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The Association of R&D and Capital Expenditures with Subsequent Earnings Variability

Authors

  • Eli Amir,

    1. The first and second authors are from the London Business School. The third author is from the Cass Business School, City University of London. They wish to thank Peter Pope (Editor), an anonymous referee, Dan Weiss, and seminar participants at Cardiff University, City University of London, University of Cyprus, Istanbul Commerce University, Lancaster University, London Business School, Singapore Management University, and Tel Aviv University for many useful comments and suggestions.
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  • Yanling Guan,

    1. The first and second authors are from the London Business School. The third author is from the Cass Business School, City University of London. They wish to thank Peter Pope (Editor), an anonymous referee, Dan Weiss, and seminar participants at Cardiff University, City University of London, University of Cyprus, Istanbul Commerce University, Lancaster University, London Business School, Singapore Management University, and Tel Aviv University for many useful comments and suggestions.
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  • Gilad Livne

    Corresponding author
    1. The first and second authors are from the London Business School. The third author is from the Cass Business School, City University of London. They wish to thank Peter Pope (Editor), an anonymous referee, Dan Weiss, and seminar participants at Cardiff University, City University of London, University of Cyprus, Istanbul Commerce University, Lancaster University, London Business School, Singapore Management University, and Tel Aviv University for many useful comments and suggestions.
    Search for more papers by this author

* Address for correspondence: Eli Amir, London Business School, Regent's Park, Sussex Place, London NW1 4SA, UK.
e-mail: eamir@london.edu

Abstract

Abstract:  We estimate the association of investments in R&D and in physical assets (CAPEX) with subsequent earnings variability. We estimate these relations in different time periods and across industries. We find that R&D contributes to subsequent earnings variability more than CAPEX only in relative R&D-intensive industries – industries in which R&D is relatively more intensive than physical capital. In physical assets-intensive industries, we do not find similar relations. The findings suggest that with respect to subsequent earnings variability, fundamental differences between investment information about R&D and CAPEX exist. However, they are mainly noticeable in firms that operate in relatively R&D-intensive industries. The evidence also suggests there was a shift in the relations between R&D and CAPEX over time. Our findings contribute to the debate on accounting for R&D expenditures.

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