Professor Narendra Bhana, Emeritus Professor at the Management College of Southern Africa (MANCOSA) shared the findings of his study on The Valuation of Research and Development Expenditures: The Case for companies listed on the Johannesburg Stock Exchange (JSE) colleagues at a research forum organised by MANCOSA’s Research department this December.
According to Professor Bhana the difficulty that exists in measuring the long-term benefits of Research and Development (R&D) expenditures and distortions induced by R&D accounting policies suggests that R&D intensive firms could be undervalued. The study took cognisance of JSE listed companies that made 93 announcements of increased Research and Development (R&D) expenditures between 1995 and 2009.
Research findings indicate that accounting bias of completely expensing all R&D expenses in the year they are incurred, is the main cause of the investor undervaluation of R&D expenditures observed in South Africa. This conclusion is based on the following findings:
- An under-reaction, as manifested in the significantly positive abnormal stock returns that the sample companies’ shareholders experienced in the three-year period following these R&D increases.
- The R&D sample companies displayed statistically significant positive abnormal operating performance in the three-year period following the R&D spending announcements.
- The market is slow in recognising that R&D spending increases are beneficial to long-term investments.
Professor Bhana who holds a Master of Accounting Science and a Doctorate of Commerce in Accountancy is a Research Fellow of the University of Durban –Westville (now UKZN). He publishes regularly in peer reviewed journals in the areas of corporate finance and strategies for investing on the JSE.
