What R&D Assets Say about Firm Profitability

Abstract

Research and development (R&D) activities are usually considered a key factor for achieving superior performances. Using a sample of 11,897 manufacturing Italian firms, we examine the relationship between R&D expenditure that is capitalized as an intangible asset and some proxies of firm profitability over a period of four years in order to explore whether R&D assets can help investors in the identification of profitable firms. Contrary to expectations, this paper found a negative and/or an insignificant association between R&D assets and proxies of firm profitability. Although there are several possible explanations for this result, what we learn from this study is that R&D assets are not on average a reliable indicator for detecting profitable firms. Research findings revealed that firms with R&D assets appear to be not so profitable, large and levered.