The Association between the Uncertainty of Future Economic Benefits and Current R&D and Capital Expenditures: Industry and Intertemporal Analyses

Since 1974, R&D expenditures have been fully expensed when incurred partly because R&D activities are claimed to be associated with a high degree of uncertainty in future economic benefits. In this study, we estimate the association between R&D expenditures and capital expenditures (CAPEX) and the variance of future earnings per share and operating income. We show that R&D expenditures lead to higher volatility of future earnings than capital expenditures only in R&D-intensive industries, where industry R&D intensity is measured as the R&D-to-CAPEX ratio. We also find that the stronger association of R&D with uncertainty in future earnings is a recent phenomenon. Finally, we show that in industries that are relatively less dependent on R&D activities, the probability of recovering R&D expenditures is similar to that of capital expenditures. Overall, our results suggest that while some industries engage in a more innovative and uncertain R&D activities, R&D in other industries is less uncertain. These results suggest that the impact of R&D on future performance considerably varies across industries and time periods.