The Impact of Research and Development Expenditures on the Value Relevance of Accounting Items

Abstract

The literature extensively analyses research and development expenditures (RDE) from the valuation perspective and documents its direct value relevance (VR). In this paper, in addition to revealing VR of RDE, we shed light on the impact of RDE on VR of book value of equity (BV) and earnings figures; hence, we analyze the indirect impact of RDE on VR of accounting items. By examining listed firms on the Borsa Istanbul between 2009 and 2018, we document that the impact of RDE on market values is significantly positive. Moreover, we report that the impact of BV (earnings) on market values becomes negative (more positive) RDE increase which should be read as evidence for the shifted attention of the market from the balance sheet to the income statement with increasing RDE. As losses convey more information than profits (Hayn, C., Journal of Accounting and Economics 20:125-153, 1995), we further extend our analyses by considering profit and loss firms. For loss recording firms, RDE significantly and negatively affect market values although this effect becomes insignificant for observations with RDE. Furthermore, as RDE increase, for loss firms, the impact of BV on market values significantly becomes negative while the impact of earnings on market values remains statistically unaffected. When analyses are reperformed for observations with RDE, all these statistically significant outcomes disappear which may indicate that our main outcomes may be driven by firms with no RDE.