The Effect of Intangible Investments on Earnings Decoupling －Evidence from Korea－

Prior studies document that a firm’s earnings performance is determined by firm－specific factors rather than market and industry level factors. Recent evidence also suggests that a firm’s earnings result from firm’s unique capabilities and intangible investment. We examine the effect of intangible investment such as R&D expenditure, advertisement expense, and educational and training expense on earnings decoupling. There are two relative views for the relationship between intangible investment and earnings decoupling. First, the resource－based view argues that intangible investment is hard to be replicated and it affects decoupling in firms’ earnings performance. Second, the public－good views insist that intangible assets are susceptible to expropriation. Hence, firm’s performance is likely to be a public good. Therefore, we seek to find which view is the more rational, the resource－based or the public－goods views. The empirical results of this study reveal that current R&D expenditure is positively associated with the earnings decoupling. Interestingly, current capitalized R&D expenditure is not significant but current expensed R&D expenditure is positively associated with the earnings decoupling. Thus, firms need to select accounting choice of expensed R&D expenditure rather than capitalized R&D expenditure to enhance earnings decoupling and to differentiate themselves economically from their rivals. We also find there is negative impact of R&D stock on earnings decoupling. This result suggests that R&D investments allow firms to differentiate themselves economically in the short－run, but the dominant effect of R&D investments will be to generate economic commonalities in the long run. Advertisement expense does not explain earnings decoupling. Finally, we find there is negative and significant relation between educational and training expense and earnings decoupling. This finding indicates that if an employee who has become more capable through education and training resigns from a firm and changes jobs within the same field, a firm’s performance and rival’s performance are likely to move together. We show there is empirical evidence on the relationship between intangible investment and firm－specific earnings. Specifically, we document relative explanation of the resource－based versus the public－goods view of intangibles.