R&D investments, capital expenditures, and earnings thresholds

Thomas G. Canace, Scott B. Jackson, Tao Ma

Review of Accounting Studies · 2018 · Volume 23 · Issue 1

Abstract

Prior studies find that firms cut research and development (R&D) expense in response to earnings considerations. We extend this stream of research by documenting that firms narrowly achieving an earnings threshold also report unusuallyhighcapital expenditures. In addition, these firms’ total investments (R&D expense plus capital expenditures) do not vary in response to earnings thresholds, which suggests that, on average, reductions in R&D expense are offset by concurrent increases in capital expenditures. Lastly, our research design allows us to infer that the increased capital expenditures are largely R&D investments that are capitalized instead of non-R&D capital expenditures, suggesting that overall investments in R&D are relatively unchanged.

Keywords

Research and development, capital expenditures, investments, earnings thresholds, earnings considerations

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