R&D profitability, intensity and market‐to‐book: evidence from Australia

Abstract

Purpose

The purpose of this paper is to assess the financial disclosure vis‐á‐vis economic reality of research and development (R&D) expensed by Australian firms under the pre‐2005 Australian generally accepted accounting principles (A‐GAAP) regime via the lens of market‐to‐book.

Design/methodology/approach

The authors estimated firms' R&D profit rate, measured R&D revenue intensity and modelled the impacts of these and related economic factors, via economic and financial disclosure channels, on market‐to‐book using data for 1988‐2004.

Findings

R&D, on average, was profit neutral and had undetectable impacts on market‐to‐book whether via equity valuation or financial disclosure.

Research limitations/implications

Market‐to‐book's information content is best viewed as conditional on the reference disclosure regime. Australian firms' typically at best minimal R&D profitability is an international anomaly. Data limitations in terms of the generating process and availability mean that R&D's impact on market‐to‐book via financial reporting is not definitively determined.

Practical implications

Restrictive rules on the capitalization of intangible asset‐related expenditures under A‐GAAP apparently did not adversely impact market‐to‐book's economic information. AIFRS's more permissive rule risks compromising market‐to‐book's reliability in such a role.

Originality/value

For Australia, the paper is anticipated to be the first to estimate the profit rate of R&D, measure the intensity of R&D, and model R&D's influence on the market‐to‐book ratio. It develops a framework for the economic and financial reporting impacts of investments on a key indicator of firms' financial standing and contributes to the debate on identifiable intangibles' disclosure.

Citation

Ahmed, K., Hillier, J. and Tanusasmita, E. (2011), "R&D profitability, intensity and market‐to‐book: evidence from Australia", Accounting Research Journal, Vol. 24 No. 2, pp. 150-177. https://doi.org/10.1108/10309611111163691