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The IUP Journal of Accounting Research and Audit Practices:
Association Between R&D Expenditure and Future Returns of Firms.
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This paper explores the association between a firmís R&D spending and its future returns. Unlike the US firms, which can only expense R&D, Australian GAAP permits firms to either expense or capitalize their R&D expenditure. India is following Ind AS 38 which requires research expenditure to be recognized as expense and development expenditure to be recognized as an intangible asset if, and only if specified criteria are met, otherwise shall be recognized as an expense. Hence, Indian setting provides for the use of both methods of accounting either expenser or capitalizer. However, less research is available that relates R&D spending of a firm to its future returns. The present study tries to find out the relationship between R&D expenditure and its future returns for R&D active Indian firms. The study is based on 15 years (2001-2015) CMIE data selected from those companies which have R&D activities during the span of the sample period. The market impact of the R&D intensity of all R&D active firms, Ďcapitalizersí and Ďexpensersí has been examined separately. The results suggest that capitalized portion of R&D is capable of generating more future returns. Expensed portion of R&D is not strongly associated with future holding period returns. However, it is observed that the firms who expensed their total R&D expenditures perform better in comparison to the firms who capitalized their total R&D expenditures.

 
 
 

Relating firmsí returns with Research and Development (R&D) activities has been gaining considerable interest among researchers as firmsí performance based on their R&D activities and the relevance of R&D accounting for firmís valuation have been the focal point of many studies. Sougiannis (1994), Lev and Sougiannis (1996), Aboody and Lev (1998), Chan et al. (2001), Godfrey and Koh (2001), Smith et al. (2001), and Oswald (2004) have tried to interlink the value of firms with R&D expenses. Most of the studies from the US show that the firm with R&D intensity earns positive risk-adjusted returns. Basically, the US follows a conservative accounting standard on R&D expenditure which requires that R&D expenditures must be recognized as expense, in view of the uncertainty of future benefits and the difficulty in matching the expense with sales (SFAS NO 2). The compulsory expensing of R&D creates difficulties for the investors in accurate assessment of firm value (Lev and Sougiannis, 1996; and Chan et al., 2001). Hence, there are growing demands for reconsideration of the conservative accounting practices on R&D and seeking choice of selective capitalization (Lev and Sougiannis 1996; and Kothari et al., 2002). India is following Ind AS 38 which requires a research expenditure to be recognized as expense and development expenditure to be recognized as an intangible asset if, and only if specified criteria are met, otherwise it shall be recognized as an expense. Hence, Indian settings provide both categories of accounting treatment either expenser or capitalizer. The present study tries to find out the relationship between R&D expenditure and its future returns for all R&D active firms.

 
 
 

Association between a firmís R&D spending and its future returns, Benefits of government programs,Expense and development expenditure .