Disclosure of Research and Development in Financial Crisis

Abstract

This study describes the disclosure of Research and Development (R&D) in financial crisis. This study deals with financial crisis of USA and UK firms and highlights the current and previous trends of R&D.

Table of Contents

CHAPTER 1: INTRODUCTION4

Overview4

Background8

CHAPTER 2: LITERATURE REVIEW10

Financial Crisis10

R&D Vague Investments16

R&D in Accounting Field18

Performance and Market Promotion of R&D21

Chapter 3: Methodology24

Method24

Research Design24

Regression Analysis Model25

CHAPTER 4: DISCUSSIONS AND ANALYSIS28

The Case of the UK28

Book-To-Market Ratio28

CHAPTER 5: CONCLUSION38

REFERENCES44

BIBLIOGRAPHY51

APPENDIX56

Chapter 3: Methodology

The research implements the methodology of Kothari (2002) but in different period which contain the financial crisis. Therefore, in this research I have applied standard deviation of realised future earning as a proxy for the uncertainty of future benefit and study will examine the sample of 50 UK firms during the years of 2006-2008.

Method

The research contains the following element:

A)An extensive literature review and highlight the rational for expensing and capitalization.

B)Regression analysis model: use current outlays for R&D and capital expenditures as the explanatory variable in regression specification and figures which related to regression are collected from DataStream.

Research Design

The main hypothesis I test is whether the variability of future earnings due to R&D investments is greater than that due to capital expenditures. I regress the standard deviation of future earnings on current R&D, capital expenditures, and other economic determinants of earnings variability, which are included as control variables in the regression. A comparison of the coefficients on R&D and capital expenditures provides an indication of the relative sensitivity of earnings variability to R&D and capital expenditures. To demonstrate that the above regression approach using realized earnings variability uncovers a relation between the market-forecasted earnings variability and investments we perform a simulation that is summarised below. The simulation shows that if an R&D investment is expected to generate a more uncertain future earnings stream than capital expenditures, then in a regression to explain realized earnings variability, the coefficient on R&D will be greater than that on capital expenditures. As mentioned above study test hypothesis is whether the variability of future earnings due to R&D is greater than that due to capital expenditure and will regress the standard deviation of future earnings on capital expenditure, current R&D, and other economic determinates of earning variability which are contained as control variables in the regression. An indication of the relative sensitivity of earning variability to R&D and capital expenditure is provided by comparison of coefficient on R&D and capital structure. (Kothari, 2002)

Simulation

The simulation is designed to formalize the intuition that the more uncertain the future benefit, the larger is the coefficient on current investment in a regression of the standard deviation of future benefits on the investment. The simulation has two parts: (1) simulate R&D, capital expenditures, and future earnings; and (2) estimate a regression of the standard deviation of realized future earnings on R&D and capital expenditures. For each simulated firm we generate annual R&D, capital expenditures, and future earnings data. Below we show the relation between the uncertainty (standard deviation) of future benefits and R&D ...