Feng Gu
Boston University
Baruch Lev
New York University
Abstract: Given the constant growth in the volume and importance of R&D expenditures, it is not surprising that the controversy concerning the proper accounting for R&D goes on. We address in this study both the relevance and reliability aspects of R&D, by identifying a set of measures/signals, centered around patents, that inform investors about the prospects (relevance) and uncertainty (reliability) of R&D. In particular, we show that: (a) investors valuation of R&D is increasing with the values of the examined signals, and (b) the variability of future earnings associated with high quality R&D, as indicated by the signals, is not substantially different than the earnings volatility associated with capital expenditures (physical assets).
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