A Research on the Value Relevance of R&D Expenses －The Emphasis on Endogenous Growth Theory－
Asian Tax Journal Vol. 12 No. 1 (2011), pp. 9-43
Abstract
This study analyzes whether the difference between high－tech industries and non－high－tech industries has an influence on the incremental explanatory power for firm value of capitalized R&D expenses. To find out the mechanism on how R&D expenditures influence firm value, we focus on the Endogenous Growth Theory developed by Romer(1986, 1990) that emphasizes growth through technology innovation. The results of this study include the following. First, we conduct a Granger causality test examining the presence of causality between two variables. To ascertain whether there is any circular relationship mentioned by the Endogenous Growth Theory between technology innovation and growth, we use R&D investments as a proxy variable for technology innovation, investment in tangible assets as a proxy variable for the effect caused by R&D investments, sales(or operating cash flow) as a proxy variable for growth. we find that such a circular relationship significantly appears in high－tech industries：R&D investments affect investments in tangible asset, and investments in tangible asset again affect sales. Second, we find that R&D expenses have a significant positive relationship with firm value. As this means that R&D expenses have the characteristics of an asset, there is more need for capitalization of R&D expenses. In case of capitalizing R&D expenses, we also find that the increase in explanatory power for firm value in high－tech industries is much larger than its increase in non－high－tech industries. Third, Although most firms treat their R&D expenditures as expenses according to the accounting standard, R&D investments compared to investments in tangible assets have been steadily increasing recently. Reflecting this phenomenon, we split our sample into two groups of 'above－average' and 'below－average' portion of the ratio of R&D investments to tangible asset investments among firms treating their R&D expenditures as expenses. In case of capitalizing R&D expenses, we find that the increase in explanatory power for firm value in 'above－average'firms is much larger than its increase in 'below－average' firms.The contribution of this study is that we provide the mechanism that R&D expenditures influence firm value thorough the circular relationship between technology innovation and growth. Further, we also provide additional evidence to support prior researches related to relaxing the strict prescriptions on the capitalization of R&D expense in that we find that firms with the above －average portion of the ration of R&D investments to tangible asset investments have the same character appearing as high－tech industries.
Keywords
- firm value
- the capitalization of R&D expenses
- Endogenous Growth Theory. high－tech industry
- Granger causality test
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