The main purpose of this study is to investigate the relationship between intangible investments (R&D, advertising, training, software acquisitions and quality) and the ability of firms to generate future OCF (hereafter cash‐flow from operations).
The authors developed dynamic panel models to estimate the relationship between intangible investments and three subsequent periods cash flows. These models are estimated using generalized method of moments (GMM), on a panel of 300 observations related to 50 Tunisian manufacturing firms and six years of data (2001‐2006).
The findings show a positive and significant effect of intangible investments on future operating cash flows. First, this result confirms the main hypothesis of resource based view (RBV). Second, it is found that investments in R&D, quality, and advertising have significant effects on future cash flows from operations. While the effect of R&D activities and quality persists until the third lagged period, the effect of advertising expenditures is rapid and temporary.
The investigation provides an empirical validation on the role of intangible investment in generating and sustaining competitive advantage. The significant effect of R&D and quality expenses indicates the role of these activities in adding value to the firm product, and hence in the creation of competitive advantage which allows the firm to manage the components of its operating cycle, especially cash received from customers, resulting in superior future cash flows from operations.
First, the use of cash‐flow basis, as an alternative approach to accrual basis, for intangibles valuation avoids the shortcomings of accrual‐based performance measures in forecasting future operating cash flows because of earnings management practices. Second, the majority of the research dealing with the valuation of intangibles has been conducted in the context of developed countries, therefore in terms of the relevance of intangible investments significantly less is known about emerging economies. The choice of Tunisia, in this regard, is a particularly important contribution to the research on emerging economies.
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