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

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  • Kamran Ahmed
  • John Hillier
  • Elisabeth Tanusasmita

Abstract

Purpose - The purpose of this paper is to assess the financial disclosurevis‐á‐viseconomic 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.

Suggested Citation

  • Kamran Ahmed & John Hillier & Elisabeth Tanusasmita, 2011. "R&D profitability, intensity and market‐to‐book: evidence from Australia," Accounting Research Journal, Emerald Group Publishing Limited, vol. 24(2), pages 150-177, September.
    • Handle: RePEc:eme:arjpps:v:24:y:2011:i:2:p:150-177
    DOI: 10.1108/10309611111163691
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    References listed on IDEAS

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    Cited by:

    1. Grzybek, Olga, 2023. "Are accounting choices for intangible assets informative or opportunistic? Evidence from Poland," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 51(C).

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