Effects of firm uncertainty on association R&D expenditure and firm performance: Evidence from Korea

R&D expenditures not only improve competitiveness but also develop future growth engines. Previous studies have been conducted in relation to the relationships between R&D expenditures and individual corporate characteristics. We examine differences in the effects of firms’ R&D expenditures on firm performance (earnings persistence, earnings growth, firm value) among the firms’ uncertainty levels. In this study, 9,767 firm-year observations that settle their account end December listed on the Korea Stock Exchange (KSE) from 2002 to 2011 were empirically analyzed. The empirical findings of the study are as follows. First, R&D expenditures of firms with higher uncertainty levels had larger effects on earnings persistence than those of firms with lower uncertainty levels. Second, R&D expenditures of firms with higher uncertainty levels had larger effects on earnings growth than those of firms with lower uncertainty levels. Finally, the R&D expenditures of firms with higher uncertainty levels had larger effects on firm value than those of firms with lower uncertainty levels. Given these results. Both uncertainty and R&D expenditures can be regarded as being determined in the long term. We contribute to existing research in three main respects. First, reflecting firms’ uncertainty levels when analyzing the effects of R&D expenditures on firm performance (earnings persistence, earnings growth, firm value) is essential. Second, the characteristics of firms’ accounting and financial characteristics should be considered when determining R&D expenditures. Third, the fact that R&D expenditures affect firm performance according to firms’ uncertainty levels is helpful when managers make decisions on R&D expenditures.