Abstract
<p>Research and development (R&amp;D) activities are usually considered a key factor for achieving superior performances. Using a sample of 11,897 manufacturing Italian firms, we examine the relationship between R&amp;D expenditure that is capitalized as an intangible asset and some proxies of firm profitability over a period of four years in order to explore whether R&amp;D assets can help investors in the identification of profitable firms. Contrary to expectations, this paper found a negative and/or an insignificant association between R&amp;D assets and proxies of firm profitability. Although there are several possible explanations for this result, what we learn from this study is that R&amp;D assets are not on average a reliable indicator for detecting profitable firms. Research findings revealed that firms with R&amp;D assets appear to be not so profitable, large and levered.</p>
Highlights
The correlation between research and development (R&D) expenditure and the economic performance of firms has been addressed by academics for different research purposes
In order to enlarge upon this issue, firm profitability, Research and development (R&D) assets and other characteristics of firms were explored using the subsample of firms that have capitalized R&D expenditure according to model (3), where the various measures of firm profitability were considered as dependent variables
In line with the research findings based on the logistic model, ordinary least square (OLS) regression results shown in Table 5 confirmed the existence of a negative correlation between firm profitability and R&D asset by total assets (R&DTA)
Summary
The correlation between research and development (R&D) expenditure and the economic performance of firms has been addressed by academics for different research purposes. Several studies have argued that a positive relation between R&D expenditure and stock market return would suggest the need to consider R&D expenditure as an intangible asset rather than recognise it as an expense when it is incurred (e.g., Hirschey & Weygandt, 1985; Kothari, Laguerre, & Leone, 2002; Goodwin & Hamed, 2006). The relation between R&D expenditure that is capitalized as intangible assets and some proxies of firm profitability is not examined in this paper in order to find evidence related to the future economic benefits of R&D expenditure, but rather to investigate whether R&D assets provide an indication for selecting profitable firms. We tested the aforementioned association by examining the average values of the proxy variables of R&D assets and firm profitability over the same term between 2011 and 2014 using two sets of regression analyses. The remainder of the paper is organized as follows: the second section presents the research hypothesis and the main related literature, the third section describes the sample selection and the survey methodology, the fourth section reports on the research findings and the last section gives concluding remarks
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