THE PARADOX OF INVESTMENT: CONSTRAINING STRATEGY

Diana Cozmiuc and Ioan Petrisor

Proceedings of the INTERNATIONAL MANAGEMENT CONFERENCE, 2015, vol. 9, issue 1, 81-96

Abstract: Studies show that managers forgo the economic benefits brought by research and development and cut these costs in order to face the pressure from investors for earnings per share. These studies are part of a relatively new discipline called value based management, that emerged as consultancy firms' advice in the 1990s and was implemented by companies around the millenium; it took several years for empirical studies about it to be possible. These two arguments have inspired a research about long-term decisions in companies according to value based management, and this article is part of this research. This article aims to analyze the arguments in favor of and opposed to correlating research and development costs to future economic benefits rather than to the period they are incurred. It is a multidisciplinary approach. The arguments in favor of relating research and development costs to future economic benefits come from strategic management and value based management. The arguments in favor of relating research and development costs to the period they are incurred come from financial accounting (with an exception) and short-termist behavior. We detect a break between forward looking information for management decisions (management accounting) and historic looking information for outside parties (financial accounting). Managers should use the former to make decisions, and value based management is the most recent stage in management accounting. Value based management practitioners among whom Siemens was selected as an example do treat research and development as an investment in the future despite the regulations of financial accounting to expend these costs. Whereas a causal relationship between research and development activities and future economic benefits is likely to exist despite uncertainty, current product sales and the cost of these sales bear no causal relation to incurred research and development costs. Management accounting that recommends the capitalization of research and development costs should inform managers about the implications of the break from financial accounting. The investment paradox is that the reason why strategic management indicates investment, uncertainty related to the early stages of a product, is the argument in financial accounting against capitalizing these costs and this latter is an obstacle to spending on research and development.

Keywords: research and development; IAS 38; value based management; product lifecycle; investment (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:rom:mancon:v:9:y:2015:i:1:p:81-96

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