Earnings Component Volatilities: Capital Versus R&D Expenditures

This study examines the relationship between R&D expenditures and product-market, process-cost, and technological innovation/disruption-related uncertainties. For this purpose, the product-market, process-cost, and technological innovation related uncertainties are linked to earnings component volatilities. Specifically, product-market uncertainty is measured by future sales volatility; process-cost uncertainty by future cost of sales volatility; and technological innovation uncertainty by future special items volatility. The results show that the associations between R&D expenditures and future sales and cost of sales volatilities are lower than those of capital expenditures. However, the association between R&D expenditures and future special items volatility is higher than that of capital expenditures. Collectively, these findings provide insights into the debate on capitalizing versus expensing R&D expenditures.