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Research and Development and Firm Performance: Investigating the need for Research and Development Expenditure as a factor of enhancing the Performance of Firms
Umeå University, Faculty of Social Sciences, Umeå School of Business and Economics (USBE), Business Administration.
2012 (English)Independent thesis Advanced level (degree of Master (Two Years)), 10 credits / 15 HE creditsStudent thesis
Abstract [en]

Despite the huge sum of money that is being spent on research and development (R & D) on yearly basis by firms, very few empirical studies exist to shed more lights about the effects of this practice on firm performance. However, the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) in their publication of International Accounting Standard (IAS) 38, require that expenditures incurred during R & D should either be expensed in the statement of comprehensive income or capitalized as an intangible asset in the statement of financial position provided certain criteria are fulfilled (IASB, 2012, p. 1045).Therefore, the main purpose of this study is to investigate the impact of expensed R & D and/or capitalized R & D on firm performance

METHOD: Data for the study was collected from the audited financial statements of firms listed at the London Stock Exchange as well as from the website of this stock market. Two sampling techniques were utilized in the study; namely stratified sampling and random sampling. Stratified sampling technique was used to stratify the companies into various industries while random sampling was used to randomly select firms that are engaged in R & D from each of these industries. The final sample consisting of 52 firms gave a total of 260 observations for a period of 5 years between December 31st, 2007 to December 31st, 2011.Expensed R & D and capitalized R & D were obtained by taking the averages of statement of comprehensive income R & D to Revenue and statement of financial position R & D to revenue respectively. Moreover, firm performance was measured using accounting-based indicators which were Return on Asset (ROA), Return on Capital Employed (ROCE), Dividend Yield (DY), Dividend Cover (DC), Earnings per Share (EPS), Price Earnings Ratio (PE) and Capital Gearing Ratio (CGR).

RESULTS: The results of the study show that expensed R & D has a significant positive impact on DC, a significant negative impact on EPS, positively correlated with CGR with no significant impact and negatively correlated with ROA, ROCE, DY and PE but had no significant impact. As concerns capitalized R & D, the results reveal that capitalized R & D has a significant negative impact on ROA, ROCE and EPS, positively correlated with CGR but have no significant impact and negatively correlated with DY, DC and PE as well though no significant impact was found.

Place, publisher, year, edition, pages
2012. , 94 p.
Keyword [en]
research and development, expensed R&D, capitalized R&D, firm performance, accounting-based indicators
National Category
Business Administration
URN: urn:nbn:se:umu:diva-65105OAI: diva2:603450
Educational program
Master's Programme in Finance
Social and Behavioural Science, Law
Available from: 2013-02-06 Created: 2013-02-06 Last updated: 2013-02-06Bibliographically approved

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