The impact of intangible intensity on relevance of R&D information: evidence from India

Abstract

Purpose

This paper aims to examine the impact of the intangible intensity of the firm on the relevance of research and development (R&D) information to determine equity values in India. Additionally, the study compares the association of input information on R&D investment (the reported R&D cost) and output information on R&D investment (patent count) with equity values. Further, the study also examines the operational nature of the firm and patent count, which is the better proxy to measure the intangible intensity of the firm.

Design/methodology/approach

The authors compared the explanatory power of R&D information between intangible and non-intangible intensive firms. To estimate the value relevance of R&D information, the authors followed the statistical model based on the theoretical framework of the residual income model.

Findings

The results indicate that there is a significant moderating impact of the intangible intensity of the firm on the relevance of R&D information to determine equity values in India over the 25 years study period (from 1991 to 2016). Further, in India, the study finds that the input information of R&D outlay is more relevant than output information on R&D outlay to determine equity values, irrespective of the proxy measure of intangible intensity. Moreover, the study finds that the operational nature of the firm is a better proxy of the intangible intensity of the firm compared to patent counts.

Research limitations/implications

In this study, pooled cross-sectional data were used for analysis. In the future, longitudinal and panel data can be used for more insightful results.

Practical implications

The findings of the study provide direction to investors and creditors to find the intrinsic value of the investments in internally developed intangible assets, which will reduce the asymmetry between the market value and accounting value of equity.

Originality/value

The paper offers insights into the impact of intangible intensity on the relevance quality of R&D information in an emerging country.

Citation

Kumari, P. and Mishra, C.S. (2021), "The impact of intangible intensity on relevance of R&D information: evidence from India", Journal of Applied Accounting Research, Vol. 22 No. 5, pp. 845-868. https://doi.org/10.1108/JAAR-06-2020-0120