Examining the Value Creation of Capital Expenditure and R&D Investments in Indian Listed Firms: A Study Utilizing Economic Value Added (EVA)

Abstract

This study examines the effects of Capital Expenditure (CAPEX) and Research & Development Expenditure (R&D), on firm value, as determined by Economic Value Added (EVA). The study covers 982 Indian-listed firms from the manufacturing and service industries. The results have been estimated using fixed effects, and random effects models for the accuracy of the estimations. The findings of this study reveal varied results in the short and long run for both manufacturing and service firms. The manufacturing companies have a negligible short-term impact of CAPEX on firm value (investment year), but a strong and positive link develops over an extended period (Years 1 to 3 post-investment). On the other hand, R&D in manufacturing companies has no significant short- or long-term effect. There is no significant impact of CAPEX in service firms in the short run, R&D initially has a negative impact on EVA, but with time, CAPEX and R&D favorably impact EVA. The results of this study have implications for both managers and investors. Creating long-term value for stakeholders is every manager's job. Since the idea of the distinction between the cost of capital and the return on capital invested (ROIC) first emerged, the concept of value creation has endured. We show how excess revenue over cost of capital results in value creation in investment spending choices by using the EVA metrics and how It may be necessary for investors to consider the greater strategic advantages that come from R&D and CAPEX, especially for those who have a long-term perspective.