Your browser does not support the PubReader view.
Go to this page to see a list of supporting browsers.
Korean Academic Society of Business Administration
[ Article ]
korean management review - Vol. 50, No. 3, pp.861-884
ISSN: 1226-1874 (Print)
Print publication date 30 Jun 2021
Received 19 Feb 2021 Accepted 26 Feb 2021
DOI: https://doi.org/10.17287/kmr.2021.50.3.861

A Study on Research and Development Cost Stickiness: Evidence from Technology Companies

Sora Yoon
(First Author) Ajou University yoonsora@ajou.ac.kr
연구개발비의 하방경직성에 관한 연구: 테크놀로지 기업을 중심으로


Copyright 2011 THE KOREAN ACADEMIC SOCIETY OF BUSINESS ADMINISTRATION
This is an open access article distributed under the terms of the Creative Commons Attribution License 4.0, which permits unrestricted, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

The purpose of this study is to examine whether R&D cost stickiness exists and the sticky behavior of R&D expense is pronounced in technology industries. The study entails testing for sticky cost behavior by comparing sales revenue in periods when revenue increases with variations in R&D expenses with revenue in periods when revenue decreases with these variations. The analysis of 109,757 firm-year observations over 41 countries from 2010 to 2019 reveals an absence of R&D expense stickiness across the entire sample; the results show that companies more aggressively reduce their R&D expenses when their sales decline, although there is statistically significant R&D expense stickiness for technology companies; this finding implies that tech managers do not reduce R&D expenditures even with declining revenue. These managers recognize R&D as an essential element for continuous innovation and survival. The findings of this study expand the empirical research on R&D expenditures and cost behavior; they can be used as a practical basis for R&D budgeting and to emphasize the need for continuous investment in R&D activities.

Keywords:

cost stickiness, technology industries, R&D intensity

References

  • Aboody, D. and B. Lev.(1998), “The Value Relevance of Intangibles: The Case of Software Capitalization,” Journal of Accounting Research, 36, pp.161-191. [https://doi.org/10.2307/2491312]
  • Anderson, M. C., R. D. Banker, and S. N. Janakiraman(2003), “Are Selling, General, and Administrative Costs ‘Sticky’?” Journal of Accounting Research, 41(1), pp.47-63. [https://doi.org/10.1111/1475-679X.00095]
  • Balakrishnan, R., M. Petersen, and N. Soderstrom(2004), “Does Capacity Utilization Affect the ‘Stickiness’ of Cost?” Journal of Accounting, Auditing and Finance 19(3), pp. 283-300. [https://doi.org/10.1177/0148558X0401900303]
  • Banker, R., M. Ciftci, and R. Mashruwala(2006), “The Effect of Prior-period Sales Changes on Cost Behavior,” Working paper, Temple University.
  • Bublitz, B. and M. Ettredge(1989), “The Information in Discretionary Outlays; Advertising, Research and Development,” The Accounting Review, 64, pp.108-124.
  • Ciftci, M. and W. M. Cready(2011), “Scale Effects of R&D as Reflected in Earnings and Returns,” Journal of Accounting and Economics, 52(1), pp.62-80. [https://doi.org/10.1016/j.jacceco.2011.02.003]
  • Chamber, D., R. Jennings, and R. Thompson(1999), “Evidence on the Usefulness of No-discretion Capitalization and Amortization Rules for Research and Development Cost,” Working paper, University of Texas, Austin.
  • Chandler, D. and R. Munday(2011), A Dictionary of Media and Communication. Oxford University Press. [https://doi.org/10.1093/acref/9780199568758.001.0001]
  • Chan, S., J. Martin, and J. Kensinger(1990), “Corporate Research and Development Expenditures,” Journal of Accounting Research, 18(Supplement), pp.27-37.
  • Chen, C., H. Lu, and T. Sougiannis(2008), “Managerial Empire Building, Corporate Governance, and the Asymmetrical Behavior of Selling, General and Administrative Costs,” Working paper, University of Illinois, Urbana Champaign. [https://doi.org/10.2139/ssrn.1014088]
  • Cooper, R. and R. Kaplan(1998), The Design of Cost Management Systems: Text, Cases, and Readings. Prentice Hall.
  • Daintith, J.(2009), A Dictionary of Physics. Oxford University Press.
  • Fazzari, S., R. Hubbard, and B. Petersen(1988), “Financial Constraints and Corporate Investment,” Brookings Papers on Economic Activity, 1, pp.141-195. [https://doi.org/10.2307/2534426]
  • Gertler, M.(1988), “Financial Structure and Aggregate Economic Activity: an Overview,” Journal of Money, Credit and Banking, 20, pp.559-588. [https://doi.org/10.2307/1992535]
  • Govindarajan, V., S. Rajgopal, A. Srivastava, and L Enache(2019), “It’s Time to Stop Treating R&D as a Discretionary Expenditure,” Harvard Business Review. Available at: https://hbr.org/2019/01/its-time-to-stop-treating-rd-as-a-discretionary-expenditure
  • Hall, B.(1993), “The Stock Market’s Valuation of R&D Investment During the 1980’s,” American Economic Review, 83(2), pp.259-267.
  • Hirschey, M.(1982), “Intangible Capital Aspects of Advertising and R&D Expenditures,” The Journal of Industrial Economics, 30(4), pp. 375-390. [https://doi.org/10.2307/2097924]
  • Hirschey, M. and J. Weygandt(1985), “Amortization Policy for Advertising and Research and Development Expenditures,” Journal of Accounting Research, 23(1), pp.326-335. [https://doi.org/10.2307/2490921]
  • Ibrahim, A.(2015), “Economic Growth and Cost Stickiness: Evidence from Egypt,” Journal of Financial Reporting and Accounting, 13, pp.119-140. [https://doi.org/10.1108/JFRA-06-2014-0052]
  • Jang, J. G., Y. S. Kim, and Y. S. Hong(2015), “The Effect of Intangible Assets on the Asymmetric Cost Behavior,” Korean Journal of Management Accounting Research, 15(1), pp.1-32.
  • Joos, P. and G. A. Plesko(2005), “Valuing Loss Firms,” The Accounting Review, 80(3), pp.847-870 [https://doi.org/10.2308/accr.2005.80.3.847]
  • Lev, B. and T. Sougiannis(1996), “The Capitalization, Amortization, and Value-Relevance of R&D,” Journal of Accounting and Economics, 21(1), pp.107-138. [https://doi.org/10.1016/0165-4101(95)00410-6]
  • Kamien, M. and N. Schwartz(1978), “Self-Financing of R&D Project,” American Economic Review, 68(3), pp.252-261.
  • Kim, B.(2019), “R&D Cost Stickiness in IT Industry,” Global Business Administration Review, 16(4), pp.97-114. [https://doi.org/10.38115/asgba.2019.16.4.97]
  • Loschky, A.(2010), “Reviewing the Nomenclature for High-Technology - the Sectoral Approach,” European Commission. Available at https://core.ac.uk/download/pdf/38620017.pdf
  • Moon, H. W., C. Ko, and H. Jung(2020), “R&D Cost Stickiness: Focused on Digital Firms,” Accounting Information Review, 38(1), pp. 27-45. [https://doi.org/10.29189/KAIAAIR.38.1.02]
  • Mun, H. and C. K. Hong(2010), “A Comprehensive Analysis of Asymmetric Cost Behaviour and its Inter-Industry Differences,” Korean Journal of Management Accounting Research, 10(1), pp.1-38.
  • Mowen, M. M., D. R. Hansen, and D. L. Heitger(2015), Cornerstones of Managerial Accounting. Cengage Learning.
  • Noreen, E.(1991), “Conditions under which Activity-Based Cost Systems Provide Relevant Costs,” Journal of Management Accounting Research, 3 (Fall 1991), pp.159-168.
  • Noreen, E. and N. Soderstrom(1997), “The Accuracy of Proportional Cost Models: Evidence from Hospital Service Departments,” Review of Accounting Studies, 2, pp.89-114. [https://doi.org/10.1023/A:1018325711417]
  • Prabowo, R., R. Hooghiemstra, and P. V. Veendirks(2018), “State Ownership, Socio-political Factors, and Labor Cost Stickiness,” European Accounting Review, 17(4), pp.771-796. [https://doi.org/10.1080/09638180.2017.1329659]
  • Sloan, R.(1996), “Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings?” The Accounting Review, 71(3), pp.289-315.
  • Sougiannis, T.(1994), “The Accounting Based Valuation of Corporate R&D, The Accounting Review,” 69(1), pp.44-69.
  • Subramaniam, C. and M. W. Watson(2016), “Additional Evidence on the Sticky Behavior of Costs,” Advances in Management Accounting, 26, pp.275-305. [https://doi.org/10.1108/S1474-787120150000026006]
  • Sun, R., K. C. Ho, Y. Gu, and C. C. Chen(2019), “Asymmetric Cost Behavior and Investment in R&D: Evidence from China’s Manufacturing Listed Companies,” Sustainability, 11. 1785. [https://doi.org/10.3390/su11061785]
  • Watanabe, C., M. Takayama, A. Naganatsu, T. Tagami, and C. Griffy-Brown(2002), “Technology Spillover as a Complement for High-Level R&D Intensity in the Pharmaceutical Industry,” Technovation, 22, pp.245-258. [https://doi.org/10.1016/S0166-4972(01)00004-9]
  • Weiss, D.(2010), “Cost Behavior and Analysts’ Earnings Forecasts,” The Accounting Review, 85(4), pp.1441-1471. [https://doi.org/10.2308/accr.2010.85.4.1441]

∙ The author Sora Yoon is an Associate Professor at Ajou University. She received her doctoral degree in accounting from Spears School of Business at Oklahoma State University. She currently teaches financial and managerial accounting, and her research interests include accounting quality, financial reporting, value relevance, and international financial reporting standards. She is also interested in management accounting issues providing useful information using technology to improve management decisions and standard setting.