Academic journal article International Journal of Business

R&D Investment and the Financial Performance of Technological Firms

Academic journal article International Journal of Business

R&D Investment and the Financial Performance of Technological Firms

Article excerpt


The growth of technological firms is based on the exploitation of innovative products and services thus forcing them to strongly invest in research and development (R&D). If the R&D expenditures announce the strategic positioning of firms, they can also significantly decrease the financial performances in terms of net income, return and risk.

With the IAS 38 standard, the R&D expenditures can be accounted as expenses or assets. This choice has an impact on financial performances but this effect is difficult to forecast because these expenditures increase the information asymmetry between shareholders and managers. We demonstrate that it is preferable to capitalize the R&D expenditures if the firm is able to draw an immediate commercial exploitation from them or to adopt a swarming strategy of innovative projects (spin-off) as the benefits arise in the future.

JEL: G32, G14, L19, O33

Keywords: R&D; Intangible asset; Capitalization; Value; Beta; Return; Performance; Risk; Accounting standard; IAS 38; Swarming; Spin-off


The nature of investments realised by firms have especially changed during the last twenty years; intangible investments developed quickly and represent a large proportion of the firms assets, which by nature are difficult to evaluate. The research and development (noted R&D thereafter) expenditures are strategic and sensitive because they intervene in the upstream of the production cycle and reveal the strategic orientations of firms. The decisional choices, resulting from the process of knowledge acquisition and rights, are irreversible and structure firms, sometimes putting them in danger. Moreover, the control of R&D activities is delicate because the developing complexity of technological projects generates an increase of control costs to overcome the information asymmetry. This is the reason why we questioned the incidence of the integration strategies upon the financial performance of firms. This research lies within the scope of the implementation of IAS 38 standard1 in the European Union for firms listed on stock exchanges. This standard should help the financial communication on intangibles assets.

Previous research shows that firms which undertake intense R&D expenditures reinforce their position on the market by improving their sales. Nevertheless, these studies did not lead to a consensus about the impacts on income and financial performance. This last aspect remains under researched.

This paper is organized in two parts. In Section II, we located our research in R&D literature in order to define our framework. We formulate assumptions to study the impacts of R&D expenditures on income, financial performance and risk of firms. In Section III, after a descriptive analysis of our sample, we test our assumptions using simple and multiple regressions, as well as tests of differences of the averages. Lastly, we discuss the results obtained in order to show what can be of interest for technological firms to adopt a strategy of R&D expenditures capitalization.


Among the studies on the performance, value and risk of the intangible assets, R&D occupies a dominating position because of the link of this intangible element with the theories of the innovation in economy. In this section, we present a review of the literature about the impacts of R&D expenditures on the firm's value, its performance and its risk in order to elaborate our assumptions.

A. R&D and the Firm's Value

Many researchers have been interested in the relationship between R&D expenditures and the firm's value. These studies are founded on a stock exchange analysis of the firms that realized immaterial capital expenditures. The objective is to establish a link between the evolutions of the market value of firms and their immaterial expenditures, generally limited to the expenditures of R&D, publicity, and patents. …

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