A Reexamination of Firm’s R&D Expenditure Behavior

Abstract

Knowledge acts as a crucial element in economic activities. For knowledge-intensive business, R&D activities maintain market competitiveness and create new firm value. R&D expenditure indeed brings forth potential growth opportunities for firm value although the growth may take a long time to achieve. Apart from that, it usually accompanies problems of agency costs and asymmetric information in daily firm operations, which, in turn, may offset the certainty of a firm’s increasing value. This study examines the decision-making on optimal R&D expenditure for listed firms in Taiwan. From January 1986 to December 2013, the data of all the listed firms excluding financial, insurance, and securities firms have been analyzed. In addition, to further explore the differences in decision-making among different macroeconomic conditions, industrial attributes and firms’ characteristics, we divide all samples into subsamples to reexamine. The empirical findings indicate that firms may weigh the cost and benefit of R&D expenditure in its decision, but the driving factor lies in firm’s return on assets (ROA), potential growth opportunity, and capital structure.