Elkemali, Taou ik
A icle
In angible and angible in es men s and u u e ea nings
ola ili y
Economies
P o ided in Coope a ion wi h:
MDPI – Mul idisciplina y Digi al Publishing Ins i u e, Basel
Sugges ed Ci a ion: Elkemali, Taou ik (2024) : In angible and angible in es men s and u u e
ea nings ola ili y, Economies, ISSN 2227-7099, MDPI, Basel, Vol. 12, Iss. 6, pp. 1-17,
h ps://doi.o g/10.3390/economies12060132
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Ci a ion: Elkemali, Taou ik. 2024.
In angible and Tangible In es men s
and Fu u e Ea nings Vola ili y.
Economies 12: 132. h ps://doi.o g/
10.3390/economies12060132
Academic Edi o s: ¸S e an C is ian
Ghe ghina and Robe Czudaj
Recei ed: 10 Ap il 2024
Re ised: 9 May 2024
Accep ed: 23 May 2024
Published: 27 May 2024
Copy igh : © 2024 by he au ho .
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economies
A icle
In angible and Tangible In es men s and Fu u e
Ea nings Vola ili y
Taou ik Elkemali 1,2,3
1Accoun ing Depa men , College o Business Adminis a ion, King Faisal Uni e si y,
Al-Ahsa 31982, Saudi A abia; [email p o ec ed]
2Finance and Accoun ing Depa men , Facul y o Economics and Managemen o Mahdia,
Uni e si y o Monas i , Monas i 5000, Tunisia
3LIGUE Labo a o y LR99ES24, ISCAE, Uni e si y o Manouba, Ci éNas 2010, Tunisia
Abs ac : This s udy del es in o he impac o in angible and angible in es men s on u u e ea nings
ola ili y wi hin he Eu opean inancial ma ke con ex . D awing om In e na ional Accoun ing
S anda ds (IAS) 16 and 38, we examine he in ica e ela ionship be ween ixed asse s, expenses,
and he unce ain y su ounding o hcoming ea nings. Ou analysis e eals ha in angible asse s,
o en associa ed wi h heigh ened unce ain y and isk, con ibu e o inc eased ea nings ola ili y
compa ed o capi al expendi u es. Fu he mo e, we ind ha capi alizing in angible asse s se es
o alle ia e unce ain y, esul ing in lowe ea nings ola ili y compa ed o expensing hem. Ou
explo a ion o indus ies’ e ec s u he ein o ce hese indings, wi h he e ec o in angible and
angible in es men s on ea nings ola ili y being mo e p onounced in high- ech indus ies han in
low- ech indus ies. Addi ionally, ou obus ness es , u ilizing goodwill as a p oxy o in angible
asse s and p ope y, plan , and equipmen as a p oxy o angible asse s, yields consis en esul s,
u he bols e ing ou indings.
Keywo ds: in angible asse s; capi al expendi u es; esea ch and de elopmen expenses; ad e ising
expenses; ea nings ola ili y
1. In oduc ion
In he con empo a y economic landscape, he ascendancy o in angible in es men s
ma ks a ans o ma i e shi in how businesses c ea e and sus ain alue. This ise e lec s a
depa u e om adi ional models cen e ed a ound angible ixed asse s, such as p ope y,
plan , and equipmen , owa ds in angible asse s like esea ch and de elopmen (R&D),
in ellec ual p ope y, b and epu a ion, and human capi al. Bo h in angible asse s and
angible ixed asse s a e expec ed o con ibu e o he company’s ope a ions and gene a e
economic bene i s o e an ex ended pe iod (IAS 16 and IAS 38).
P e ious s udies ha e p ima ily examined he in icacies associa ed wi h speci ic
in angible in es men s like R&D (Le 2001;Gu and Wang 2005;Elkemali and Rejeb 2015;
Zhang 2015;Chen e al. 2017). They conclude ha he inhe en unce ain y and isk linked
o bo h expensed and capi alized R&D a ec ma ke alua ion (Le and Sougiannis 1996;
Oswald and Za owin 2007;Li 2011;Coluccia e al. 2020;Kim e al. 2021) and subsequen
ea nings unce ain y (Ko ha i e al. 2002;Ami e al. 2007;Jeny e al. 2019).
Ou s udy b oadens his scope by explo ing he complex in e play be ween in angible
in es men s in gene al, angible in es men s, and u u e ea nings ola ili y. By conside ing
a wide ange o in angible asse s alongside angible ixed asse s, we aim o o e a mo e
comp ehensi e unde s anding o how a ious asse ypes impac ea nings ola ili y o e
ime. Fi s ly, we asse ha , owing o hei heigh ened unce ain y and complexi y, in angi-
ble asse s con ibu e mo e signi ican ly o u u e ea nings ola ili y compa ed o angible
ixed asse s. Unce ain ou comes om in angible in es men s in oduce unp edic abili y
in o inancial epo ing, as he success o ailu e o hese in es men s can signi ican ly
Economies 2024,12, 132. h ps://doi.o g/10.3390/economies12060132 h ps://www.mdpi.com/jou nal/economies
Economies 2024,12, 132 2 o 17
impac ea nings om one pe iod o ano he . Addi ionally, he subjec i e na u e o in-
angible asse alua ion can lead o signi ican luc ua ions in epo ed ea nings, u he
ampli ying ola ili y. Mo eo e , ac o s like echnological obsolescence and ambiguous
p ope y igh s associa ed wi h in angible asse s can in oduce addi ional isks, po en ially
exace ba ing ea nings ola ili y. Secondly, in acco dance wi h he IAS 38, which manda es
he ecogni ion o in angible in es men s as asse s only i i is p obable ha hey will gene -
a e u u e bene i s, we p opose ha capi alized in angibles esul in lowe u u e ea nings
luc ua ions compa ed o expensed in angibles, such as esea ch and de elopmen (R&D)
and ad e ising expenses. Expensing hese asse s may lead o highe ea nings luc ua ions
due o he immedia e impac on inancial s a emen s, wi hou accoun ing o hei endu ing
con ibu ion o u u e e enues.
Following he me hodology ou lined by Ko ha i e al. (2002) and Ami e al. (2007),
we u ilize desc ip i e and eg ession analyses o in es iga e ou wo hypo heses using da a
om 1595 Eu opean i ms spanning he yea s 2005 o 2020. Gi en ha ou me hodology
ocuses on ea nings ola ili y o e he subsequen i e yea s, he pe iod om 2016 o 2020
equi es da a only pe aining o ope a ing income. Fo ou i s hypo hesis, we in es iga e he
associa ion be ween he cu en yea ’s in angible asse s, angible ixed asse s, and ea nings
ola ili y o e he subsequen i e yea s. The second hypo hesis in ol es inco po a ing
expensed in angibles, speci ically R&D and ad e ising expenses, in o he model o e alua e
hei in luence on u u e ea nings ola ili y in compa ison o balance shee in angible asse s.
The esea ch indings con i m ha in angible asse s con ibu e o inc eased u u e
ea nings unce ain y compa ed o angible ixed asse s. Addi ionally, when compa ing
capi alized in angibles o expensed ones, we obse e ha R&D and ad e ising expenses
signi ican ly impac ea nings ola ili y. Capi alizing in angibles appea s o alle ia e un-
ce ain y compa ed o expensing hem. Fu he mo e, indus y analysis suppo s ou
hypo heses, e ealing a g ea e impac o in angible and angible in es men s on ea nings
ola ili y in high- ech sec o s. This sugges s heigh ened unce ain y in high-in angible
sec o s compa ed o low-in angible ones. Robus ness es ing ein o ces hese indings,
e en when subs i u ing o al in angible asse s wi h goodwill and capi al expendi u es wi h
p ope y, plan , and equipmen .
Ou s udy signi ican ly enhances he li e a u e by compa ing he e ec s o in angible
and angible in es men s on inancial aspec s, especially ea nings unce ain y. Th ough
comp ehensi e analysis, we ex end p e ious esea ch, a i ming he impo ance o ec-
ognizing asse s based on hei po en ial o u u e bene i s. Ou indings deepen he
unde s anding o ea nings ola ili y and isk ac oss i ms, highligh ing how in angible
asse capi aliza ion educes unce ain y compa ed o expensing hem. These insigh s
in o m ongoing discussions on accoun ing s anda ds, inancial epo ing p ac ices, and
hei implica ions o in es o s and s akeholde s. Addi ionally, ou sec o al analysis o e s
aluable insigh s in o a ia ions in he e ec s o in angible and angible in es men s ac oss
indus ies, en iching he unde s anding o asse dynamics in inancial ma ke s.
The emainde o he pape is o ganized as ollows: Sec ion 2p o ides a comp ehen-
si e e iew o he li e a u e and de elops ou hypo heses; Sec ion 3ou lines he esea ch
design; Sec ion 4desc ibes he sample used in ou analysis; Sec ion 5p esen s he empi ical
esul s; and inally, Sec ion 6o e s discussions and concluding ema ks.
2. Li e a u e and Hypo heses De elopmen
2.1. In angible Asse s, Tangible Fixed Asse s and Subsequen Ea nings Vola ili y
Ou s udy in es iga es he ela ionship be ween in angible and angible in es men s
and u u e ea nings unce ain y. Ou ini ial empi ical analysis ocuses on he i m’s balance
shee and examines he co ela ion be ween in angible asse s, angible ixed asse s, and
u u e ea nings ola ili y. We hypo hesize ha , while all u u e economic bene i s en ail
unce ain y, capi alized in angible asse s con ibu e o g ea e u u e ea nings ola ili y
compa ed o angible ixed asse s. This hypo hesis is g ounded in he widely accep ed
Economies 2024,12, 132 3 o 17
no ion ha he le el o unce ain y is ypically highe o balance shee in angible asse s
han o angible ixed asse s.
IAS 38 adop s a conse a i e s ance on in angible asse s, ye p io li e a u e ex en-
si ely demons a es ha in angible asse s inc ease complexi y and unce ain y ega ding
u u e ea nings. Ea lie esea ch highligh s se e al ac o s con ibu ing o his complexi y
(Le 2001;Ba h e al. 2001;Ba on e al. 2002;Banke e al. 2019;Ba ke e al. 2022).
In angible asse s o en in ol e unce ain e u ns, as ou comes o R&D p ojec s, b and-
building ini ia i es, o so wa e de elopmen e o s may no always ansla e in o immedia e
o measu able inancial gains. Addi ionally, angible ixed asse s ope a e wi hin es ablished
ma ke s wi h ela i ely anspa en p icing mechanisms, whe eas in angible asse s o en
exis in mo e dynamic and less anspa en ma ke s, wi h alua ion in ol ing subjec i e
and a iable elemen s. Mo eo e , angible ixed asse s o en equi e ongoing main enance o
p ese e hei alue, while in angible asse s may equi e con inuous in es men in R&D, ma -
ke ing, o legal p o ec ion o main ain o enhance hei alue, wi h isks such as echnological
obsolescence o changes in consume p e e ences po en ially a ec ing hei du abili y.
Empi ical s udies p o ide e idence suppo ing he complexi y and unce ain y associ-
a ed wi h in angible asse s compa ed o angible asse s.
Choi e al. (2000) in es iga e he co ela ion be ween in angible asse s, hei co e-
sponding amo iza ion cos s, and ma ke alua ion. Thei indings sugges a a o able
ecep ion o epo ed in angible asse s by he inancial ma ke . Addi ionally, hey obse e
ha he ma ke assigns a lowe alue o a dolla o in angible asse s compa ed o angible
ixed asse s, indica ing ha he ma ke pe cei es he bene i s linked wi h in angible asse s
as mo e unce ain han hose associa ed wi h p ope y, plan , and equipmen (PPE).
Ba h e al. (2001) del e in o he impac o in angible asse s on analys s’ mo i a ions o
co e a i m. Thei indings sugges ha acknowledged in angible asse s a e less in o ma i e
compa ed o angible ixed asse s, a ac o ha leads o an inc ease in analys co e age. The
wo h o angible asse s is gene ally less suscep ible o in o ma ion imbalance and inhe en
unce ain y. This is because angible asse s a e less likely o be unique o a pa icula i m
compa ed o in angible asse s, educing he mo i a ion o ob aining p i a e in o ma ion.
Ko ha i e al. (2002) explo e how R&D expendi u e ela es o u u e ea nings a iabili y,
while conside ing ac o s such as capi al expendi u es, ad e ising, i m size, and inancial
le e age. Thei indings indica e ha R&D in es men s a e mo e posi i ely co ela ed wi h
u u e ea nings a iabili y compa ed o capi al expendi u es. This e idence suppo s he
idea ha R&D ca ies a highe le el o isk compa ed o in es men s in physical asse s.
Gu and Wang (2005) analyze how analys s’ o ecas e o s a e in luenced by a i m’s in-
angible in ensi y, co e ing aspec s such as R&D, ad e ising expenses, and o al in angible
asse s. Gi en he complexi y o in o ma ion ela ed o in angible asse s, hey disco e ha
o ecas e o s end o be highe o i ms wi h highe in angible in ensi y le els compa ed
o he indus y a e age.
Ami e al. (2007) examine he co ela ion be ween in es men s in R&D, capi al ex-
pendi u es ( angible ixed asse s), and subsequen ea nings a iabili y ac oss a ious ime
pe iods and indus ies. Thei indings indica e ha R&D expendi u es (capi al and expenses)
con ibu e mo e signi ican ly o subsequen ea nings a iabili y compa ed o capi al expendi-
u es only wi hin indus ies ha a e ela i ely mo e R&D-in ensi e. Howe e , in indus ies
cha ac e ized by a high in ensi y o physical asse s, hey do no obse e simila associa ions.
These esul s imply ha undamen al dispa i ies exis in he in es men in o ma ion ega ding
R&D and capi al expendi u es conce ning subsequen ea nings a iabili y.
Li e al. (2020) illus a e ha in angible asse s play a signi ican ole in explaining puzzles
ela ed o idiosync a ic ola ili y, pa icula ly among companies wi h g ea e in angible asse
holdings. The associa ion be ween in angible in ensi y and s ock p ice c ash isk is examined
by Wu and Lai (2020). Thei indings e eal ha in angible–in ensi e i ms a e linked o high
c ash isk. The b eakdown o in angible in ensi y poin s o goodwill as he p ima y ac o and
highligh s i s p edic abili y o u u e impai men e en s. Addi ionally, in angible in ensi y
in luences s ock p ice c ash isk p ima ily h ough heigh ened in o ma ion asymme y, wi h
Economies 2024,12, 132 4 o 17
he posi i e co ela ion s eng hening in andem wi h s ock p ice synch onici y, CEO isk-
aking incen i es, and sha eholde li iga ion isk. Le e al. (2021) unco e ha R&D p ojec s
inc ease echnology inno a ion unce ain y, wi h he link be ween hese expendi u es and
u u e ola ili y in special i ems being s onge han ha o capi al expendi u es. In hei s udy,
Jung and Kho (2022) examine he a ia ions in ma ke esponses o ea nings news among
U.S. i ms wi h di e ing le els o in angible capi al. They hypo hesize ha in es o s may
s uggle o in e p e ea nings news o i ms wi h subs an ial in angible capi al, esul ing in
mo e p onounced eac ions o such news. By quan i ying in angible capi al as he combined
o al o ex e nally acqui ed and in e nally gene a ed in angible asse s, hey demons a e ha
bo h immedia e and delayed ma ke esponses o ea nings news a e mo e signi ican o
i ms wi h high le els o in angible capi al. Fe e e al. (2022) ind ha he unce ain y and
isk associa ed wi h in angible in ensi y educe analys s’ o ecas accu acy. When classi ying
companies in o high- and low-in angible asse g oups based on he median le el o in angible
asse s, Elkemali (2024) obse e ha in angible asse s ampli y analys s’ o e eac ions and
unde eac ions o ea nings announcemen s.
Conside ing hese complexi ies and ecognizing ha he gene a ion o u u e ea nings
is a p ima y c i e ion o classi ying an i em as an asse , ou s udy ex ends p e ious li e a-
u e by examining he impac o in angible asse s on u u e ea nings ola ili y compa ed
o angible ixed asse s. We an icipa e ha in angible asse s lead o g ea e ea nings luc-
ua ions compa ed o in es men s in angible asse s. This expec a ion s ems om se e al
inhe en ac o s associa ed wi h in angible asse s. These in es men s en ail unce ain e-
u ns and in oducing unp edic abili y in o inancial epo ing, as he success o ailu e
o in angible in es men s can signi ican ly impac ea nings om one pe iod o ano he .
Addi ionally, while angible ixed asse s like buildings o machine y gene ally ha e easily
asce ainable alues based on ma ke p ices o eplacemen cos s, in angible asse s such as
pa en s, copy igh s, o b and alue a e o en mo e challenging o alue due o he lack o
eadily a ailable ma ke p ices and subjec i e o con ingen alues. This alua ion com-
plexi y exace ba es ea nings ola ili y, as subjec i e assessmen s o in angible asse alues
can lead o signi ican luc ua ions in epo ed ea nings. Fu he mo e, while consis en
main enance p ese es in angible asse alue, he isk o obsolescence o shi s in consume
p e e ences impac s he esilience o in angible asse s, ampli ying luc ua ions in ea nings
ola ili y. Mo eo e , in angible asse s a e o en subjec o complex egula o y amewo ks
go e ning in ellec ual p ope y igh s, pa en s, and copy igh s, and changes in egula ions
o legal dispu es can in oduce conside able unce ain y and ola ili y in o a company’s
ea nings. Many in angible asse s, such as specialized skills o knowledge, a e closely ied o
human capi al, and luc ua ions in employee u no e a es, alen acquisi ion, o wo k o ce
skill le els can di ec ly in luence he alue and e ec i eness o hese asse s. Consequen ly,
companies elian on in angible asse s may expe ience g ea e ea nings unce ain y due o
shi s in hei human esou ce landscape.
Gi en he addi ional challenges posed by in angible asse s compa ed o angible ixed
asse s ela ed o alua ion, ma ke dynamics, egula ions, and dependence on human
capi al, we posi he i s hypo hesis:
Hypo hesis 1 (H1). In angible asse s con ibu e o g ea e u u e ea nings ola ili y compa ed o
angible ixed asse s.
2.2. Capi aliza ion and Expensing o In angibles and Subsequen Ea nings Vola ili y
Ou s udy no only examines he associa ion be ween asse in angibili y and u u e
ea nings ola ili y bu also del es in o he impac o capi alizing (in angible asse s) and
expensing in angibles on u u e ea nings ola ili y wi hin he ealm o in angibles. While
he gene ally accep ed accoun ing p inciples (US GAAP) equi e he capi aliza ion o
pu chased in angibles a cos and he ull expensing o in e nally c ea ed in angibles such
as R&D and ad e ising expendi u es, IAS 38 ecognizes pu chased in angibles as asse s
and allows capi alizing in e nally de eloped in angibles i i is expec ed ha hey will
Economies 2024,12, 132 5 o 17
gene a e u u e bene i s o he en i y. O he wise, sel -c ea ed in angibles a e expensed.
In e nal in es men s in in angibles a e ypically pe cei ed o en ail a highe le el o u u e
ea nings unce ain y compa ed o pu chased in angibles o angible ixed asse s.
The li e a u e ex ensi ely examines he impac o capi alized and expensed in angibles
on a i m’s ea nings unce ain y. Ba h e al. (2001) indica e ha companies wi h highe
le els o un ecognized in angibles ecei e mo e analys a en ion, pa icula ly hose wi h
ele a ed R&D and ad e ising expenses, e lec ing highe unce ain y equi ing g ea e co -
e age. Ba on e al. (2002) no e ha analys consensus o ecas s a dec ease in balance shee
in angibles, sugges ing highe ea nings unce ain y o companies in es ing in in e nal
in angibles. Ami e al. (2007) a gue ha R&D capi al con ibu es mo e o u u e ea nings
a iabili y han R&D expenses, con as ing Oswald and Za owin’s (2007) indings, which
show ha capi alizing R&D gene a es highe u u e ea nings and s ock e u ns. Pandi
e al. (2011) e eal a nega i e co ela ion be ween u u e ope a ing pe o mance ola ili y
and pa en quali y, especially p onounced in i ms wi h ex ensi e R&D spending and
pa en po olios, indica ing less ola ile u u e ope a ing pe o mance o i ms wi h mo e
p oduc i e R&D. Le (2019) highligh s he impo ance o ecognizing in e nally de eloped
in angible asse s o main ain he ele ance o inancial s a emen s, suppo ed by Chen e al.
(2017) and Jeny and Moldo an’s (2022) indings o g ea e alue ele ance o capi alized
R&D compa ed o expensed R&D. Xiang e al. (2020) ind an in e se co ela ion be ween
R&D expense ola ili y and s ock e u ns, indica ing in es o s’ un a o able esponse o
luc ua ions in R&D expenses. Huang e al. (2022) a gue ha in es o s end o demand
highe p emiums om companies when assessing he u u e success o hei esea ch and
de elopmen (R&D) endea o s. In assessing he calibe o R&D da a, hey o mula ed
a me ic e med R&D In o ma ion Quali y (RDIQ), which links a i m’s his o ical R&D
in es men (expendi u es) o i s inno a ion ou comes (sales). Thei indings indica e ha
he impac o RDIQ shows weak co ela ion wi h commonly employed isk ac o s, being
mo e p onounced o companies ope a ing in highly unce ain business en i onmen s, and
demons a es addi ional p icing in luence.
Cho and Kim’s (2024) esea ch e eals ha capi alized de elopmen expendi u es
hold alue ele ance solely o i ms cha ac e ized by a high le el o consis ency in hei
capi aliza ion a ios. Fu he mo e, s able R&D capi aliza ion a ios enhance he abili y o
s ock e u ns o e lec mo e in o ma ion ega ding u u e ea nings accu a ely. Las ly, hey
no e ha he bene icial impac o consis en capi aliza ion a ios on he alue ele ance o
capi alized de elopmen expendi u es and he in o ma i eness o s ock p ices in ensi ies
ollowing he adop ion o In e na ional Financial Repo ing S anda ds (IFRS).
Based on p io li e a u e, ou second hypo hesis expec s ha capi alized in angibles
con ibu e o lowe ea nings ola ili y compa ed o expensed in angibles. This an icipa ion
a ises om he accoun ing ea men o hese asse s, whe e capi alized in angibles a e
ecognized on he balance shee and amo ized o e hei use ul li es, whe eas expensed
in angibles a e immedia ely cha ged agains ea nings in he pe iod hey a e incu ed.
Capi alized in angibles, by i ue o hei ecogni ion on he balance shee , p o ide
a mo e s able ep esen a ion o he company’s asse s and inancial posi ion o e ime.
Amo izing he cos o hese in angibles o e hei use ul li es smoo hens he impac on
ea nings, dis ibu ing he expense o e mul iple pe iods a he han a signi ican one- ime
hi . This amo iza ion p ocess helps o mi iga e ea nings ola ili y, as he expense is sp ead
ou o e ime, aligning wi h he bene i s de i ed om he in angible asse .
In con as , expensed in angibles esul in a di ec educ ion in ea nings in he pe iod
hey a e incu ed, po en ially leading o signi ican luc ua ions in epo ed ea nings.
Wi hou he bene i o sp eading he cos o e mul iple pe iods, expensed in angibles can
cause spikes o dips in ea nings, depending on he size and iming o he expendi u e.
Fu he mo e, he capi aliza ion o in angibles e lec s managemen ’s judgmen e-
ga ding he long- e m alue and sus ainabili y o hese asse s. By capi alizing ce ain
in angibles, managemen signals hei belie in he endu ing alue o hese asse s, which
Economies 2024,12, 132 6 o 17
can posi i ely in luence in es o pe cep ions and ma ke con idence, po en ially educing
ma ke eac ions o ea nings luc ua ions.
O e all, he hypo hesis posi s ha he ecogni ion and ea men o in angible asse s on
he balance shee , ei he as capi alized o expensed, signi ican ly in luence ea nings ola il-
i y. Capi alized in angibles, wi h hei amo iza ion o e ime and signaling o long- e m
alue, a e expec ed o con ibu e o lowe ea nings ola ili y compa ed o expensed in an-
gibles. Capi alizing in angibles on he balance shee implies ha hese cos s a e expec ed o
be ecupe a ed in he u u e, al hough he speci ic iming o such ecupe a ion equen ly
emains unclea . Con e sely, expensing in e nally c ea ed in angibles sugges s a educed
likelihood o ealizing u u e bene i s and conside able unce ain y abou when hese bene-
i s migh eme ge. As a esul , he unce ain y su ounding ecognized in angibles ends o
be subs an ially lowe han ha ela ed o expensed in angibles.
Taken oge he , ou second hypo hesis ocuses on he ea men o in angibles and a spe-
ci ic indica o o ea nings unce ain y, namely ea nings ola ili y, and sugges s
he ollowing:
Hypo hesis 2 (H2). Capi alizing in angibles con ibu es o lowe u u e ea nings ola ili y
compa ed o expensing in angibles.
3. Resea ch Design
3.1. Impac o In angible Asse s and Tangible Fixed Asse s on Fu u e Ea nings Vola ili y
To explo e ou i s hypo hesis ega ding he highe impac o in angible asse s com-
pa ed o angible ixed asse s on u u e ea nings ola ili y, we an icipa e ha he na u e
o hese asse s will signi ican ly in luence he s abili y and a iabili y o ea nings o e
ime. Speci ically, we expec ha companies wi h highe le els o in angible asse s, such as
in ellec ual p ope y, goodwill and b and alue, may expe ience g ea e ea nings ola ili y
compa ed o hose p ima ily in es ed in angible ixed asse s. This expec a ion is oo ed in
he ecogni ion ha in angible asse s, while aluable, o en in ol e subjec i e alua ion
me hods and may be mo e sensi i e o ma ke luc ua ions and changes in consume p e e -
ences. Con e sely, we an icipa e ha companies wi h a g ea e emphasis on angible ixed
asse s, such as p ope y, plan , and equipmen , may exhibi mo e s able ea nings pa e ns
due o he physical and angible na u e o hese asse s. By in es iga ing he ela ionship
be ween asse composi ion and u u e ea nings ola ili y, we aim o gain insigh s in o he
d i e s o inancial pe o mance and he ole o asse alloca ion s a egies in managing isk
and unce ain y. To in es iga e his hypo hesis, we employ eg ession analyses (Model 1)
de i ed om Ko ha i e al. (2002) and Ami e al. (2007). Speci ically, we in eg a e in angi-
ble asse s (IA) in o hei models. We eg ess u u e ea nings ola ili y om yea
+1
o
+5
(SDOI) on he cu en yea ’s in angible asse s (IA) and angible ixed asse s (measu ed
by capi al expendi u es CAPEX), alongside inancial le e age (LEV) and i m size (SIZE),
se ing as con ol a iables o ea nings unce ain y
SDOIi, +1 o +5 =α0+β1IAi +β2CAPEXi +β3LEVi +β4SIZEi +ζ(1)
whe e, o i m i, SDOI ep esen s u u e ea nings ola ili y calcula ed as he s anda d de-
ia ion o ope a ing income pe sha e be o e dep ecia ion, amo iza ion, ad e ising, and
R&D, om + 1 o + 5, de la ed by he beginning o he pe iod s ock p ice (P). A i e-yea
pe iod o SDOI aligns well wi h he ypical use ul li e and bene i gene a ed om in es -
men s in bo h angible and in angible asse s. The ea nings ola ili y measu ed pe ains o
annual ea nings a he han qua e ly. While qua e ly da a may o e mo e equen insigh s
in o ea nings luc ua ions, annual da a p o ide a comp ehensi e iew o ea nings pe o -
mance o e a longe ime ame, aligning wi h s anda d epo ing p ac ices and acili a ing
compa abili y ac oss i ms and indus ies. In con as o Ko ha i e al. (2002), we deduc
ad e ising and R&D expenses o mi iga e any ola ili y s emming om he cu en yea .
Fu he mo e, excluding dep ecia ion and amo iza ion helps minimize ea nings manipula ion
and o e s a mo e accu a e ep esen a ion o u u e ea nings luc ua ions a ising om p e ious
in es men s in angible and in angible asse s. IA s ands o balance shee in angible asse s
Economies 2024,12, 132 7 o 17
scaled by lagged ma ke alue o equi y (MV), wi h MV calcula ed as he end-o - iscal-yea
sha e p ice mul iplied by he common sha es ou s anding. MV is measu ed a he beginning
o yea (End yea
−
1) when i is used as de la o . CAPEX deno es angible ixed asse s
measu ed by capi al expendi u es de la ed by MV. Aligning wi h Ko ha i e al. (2002) and
Ami e al. (2007), we use MV as he de la o and no o al asse s o ensu e compa abili y o
indings wi h hei esul s. Bo h IA and CAPEX ep esen long- e m asse s, gene a ing u u e
bene i s. CAPEX ypically deno es in es men s in angible asse s made du ing a speci ic
pe iod, e lec ing ongoing capi al expendi u e ac i i ies. These in es men s a e eco ded in he
cash low s a emen as a dec ease in cash ela ed o in es ing ac i i ies, while simul aneously
inc easing cumula i e angible asse s on he balance shee . Con e sely, IA, as cap u ed om
he balance shee , encompasses he cumula i e s ock o in angible asse s held by he i m
o e ime. We expec ha he coe icien o IA will be posi i ely highe han CAPEX, as we
an icipa e ha he unce ain y ela ed o in angible asse s is highe han ha ela ed o angible
ixed asse s, leading o highe ea nings ola ili y.
Con ol a iables include i m size and le e age as de e minan s o ea nings ola ili y
(Bea e e al. 1970;Fama and MacBe h 1973). The i m SIZE ep esen s he loga i hm
o ma ke alue o equi y (MV) a he end o yea , while LEV, a me ic o inancial
le e age, is calcula ed by summing long- e m deb and he cu en po ion o long- e m
deb , hen di iding by he o al o long- e m deb , he cu en po ion o long- e m deb ,
and ma ke alue o equi y. La ge companies may ha e s onge inancial s abili y and
access o esou ces o wea he economic down u ns, educing he likelihood o signi ican
luc ua ions in ea nings. Addi ionally, high le e age obliga es companies o mee ixed
deb obliga ions, such as in e es paymen s, ega dless o ea nings pe o mance. The e o e,
du ing pe iods o low ea nings, highly le e aged companies may expe ience g ea e
inancial s ain, leading o inc eased ola ili y in ea nings.
All a iables a e measu ed a he end o he yea excep SDOI, measu ed o he
subsequen i e yea s om + 1 o + 5. In cases whe e he e a e missing da a o
ope a ing income (OI) o he i e yea s, we include OI o he cu en yea ollowed by
he subsequen ou yea s o OI. I he e a e wo missing OI da a poin s, we s a om he
OI o he cu en yea and comple e he missing da a wi h he a e age o he a ailable ou
yea s’ da a. All a iable measu es a e p esen ed in Appendix A.
To mi iga e he po en ial in luence o indus y-speci ic ac o s, ou eg ession is con-
duc ed o bo h high- ech (HT) indus ies and low- ech (LT) indus ies based on he de-
composi ion o Kwon 2002. This app oach ensu es ha he e ec s obse ed a e no solely
d i en by indus y cha ac e is ics. By compa ing i ms wi hin simila indus y ca ego ies
based on hei asse composi ion and unce ain y, he analyses can be e isola e and assess
he impac o in angible asse s and angible ixed asse s on a ious inancial me ics, such
as ea nings ola ili y, wi hou being con ounded by indus y-speci ic di e ences.
3.2. Impac o Capi alizing In angibles and Expensing In angibles on Fu u e Ea nings Vola ili y
In ou second hypo hesis, we an icipa e ha capi alizing in angibles will lead o lowe
u u e ea nings ola ili y compa ed o expensing in angibles. This expec a ion is g ounded in
he p emise ha capi alizing in angibles allows o hei ecogni ion as asse s on he balance
shee , he eby sp eading hei cos s o e ime and po en ially smoo hing ou luc ua ions
in ea nings. In con as , expensing in angibles immedia ely impac s ea nings, which may
esul in mo e p onounced luc ua ions in inancial pe o mance o e ime. By capi alizing
in angibles, i ms can be e align hei epo ed ea nings wi h he economic bene i s de i ed
om hese asse s, ul ima ely leading o g ea e s abili y and p edic abili y in u u e ea n-
ings. To es his hypo hesis, ou ocus shi s o Model 2, an ex ension o Model 1, which
inco po a es addi ional a iables o p o ide a mo e comp ehensi e unde s anding o he
ac o s in luencing u u e ea nings ola ili y. In his expanded model, we in eg a e R&D (RD)
expenses and Ad e ising (AD) expenses alongside he p e iously conside ed capi alized
Economies 2024,12, 132 8 o 17
in angibles (IA). Ou objec i e is o examine he impac o hese expensed in angibles in
compa ison o capi alized in angibles on he ola ili y o u u e ea nings
SDOIi, +1 o +5 =α0+β1IAi +β2CAPEXi +β3LEVi +β4SIZEi +β5RDi +β6ADi +ζ(2)
whe e RD ep esen s R&D expenses, de la ed by ma ke alue (MV) o accoun o a i-
a ions in i m size and ma ke dynamics. AD signi ies ad e ising expenses de la ed by
MV. All o he a iables a e desc ibed in Appendix A. We an icipa e ha he coe icien s (
β5
and
β6
) associa ed wi h RD and AD expenses will be posi i ely g ea e han he coe icien
(
β1
) linked o capi alized in angibles (IA). Fu he mo e, we expec he di e ences be ween
he coe icien s (
β5
and
β6
) associa ed wi h RD and AD expenses and he coe icien (
β1
)
linked o IA o be s a is ically signi ican . This expec a ion is oo ed in he unde s anding
ha expensed in angibles, such as R&D and ad e ising expenses, ha e an immedia e
impac on cu en -pe iod ea nings and signal ongoing in es men s in inno a ion and
ma ke posi ioning. Consequen ly, we p edic hese expenses o exe a mo e p onounced
in luence on u u e ea nings ola ili y compa ed o capi alized in angibles. The inhe en
cha ac e is ics o expensed in angibles, combined wi h hei immedia e e ec on ea nings,
a e likely o lead o no iceable di e ences in hei in luence on u u e ea nings ola ili y. As
wi h Model 1, we conduc an indus y e ec analysis.
3.3. Robus ness Tes
To s eng hen he obus ness o ou analysis, we conduc a sensi i i y es by subs i u -
ing, in model (2), in angible asse s wi h goodwill, a speci ic i em subjec o highe le els o
judgmen and measu emen issues. Goodwill, pa icula ly when acqui ed unde business
combina ions, equi es he de e mina ion o ai alue, which in ol es conside able disc e-
ion. Addi ionally, goodwill is cha ac e ized by an inde ini e use ul li e and necessi a es
impai men es ing. By eplacing in angible asse s wi h goodwill in ou model, we e i y
he consis ency and eliabili y o ou esul s, p o iding insigh s in o he gene alizabili y o
ou conclusions ac oss di e en ypes o in angible asse s.
In addi ion, we eplace, in model (2), capi al expendi u es wi h p ope y, plan , and
equipmen (PPE) as he cumula i e in es men o e he yea s (Ko ha i e al. 2002). PPE
ep esen s he agg ega e alue o physical asse s u ilized in business ope a ions, acc ued
o e ime h ough capi al expendi u es. This adjus men allows us o accoun o he
cumula i e impac o in es men s in angible asse s on u u e ea nings ola ili y, o e ing
a mo e comp ehensi e pe spec i e on he ela ionship be ween asse composi ion and
inancial pe o mance. By inco po a ing PPE as a cumula i e measu e, we aim o cap u e
he long- e m implica ions o angible asse in es men s on ea nings s abili y. Consequen ly,
we es he ollowing model o he o al sample, HT, and LT indus ies:
SDOIi, +1 o +5 =α0+β1GDWILLi +β2PPEi +β3LEVi +β4SIZEi +β5RDi +β6ADi +ζ(3)
whe e GDWILL is measu ed as goodwill de la ed by lagged ma ke alue o equi y MV. PPE
is calcula ed as ne PPE, de la ed by lagged ma ke alue o equi y. All a iables a e p esen ed
in Appendix A. We an icipa e simila coe icien esul s as hose p o ided by models 1 and 2.
4. Sample
To examine ou hypo heses, we ha e ex ac ed a sample om he Compus a Global
Da abase, consis ing o indus ial Eu opean i ms spanning om 2005 o 2020 (Table 1).
Ou chosen ime ame coincides wi h he ini ia ion o he adop ion o IFRS by he Eu opean
Union, commencing in 2005 and ex ending un il 2020, which ma ks he la es a ailable yea
o da a. Gi en he na u e o ou s udy, which ocuses on assessing ea nings ola ili y o e
a i e-yea pe iod, we equi e, om 2016 o 2020, only da a pe aining o ope a ing income.
This selec ion c i e ia ensu es ha we cap u e a comp ehensi e iew o he pos -IFRS
adop ion landscape and i s impac on ea nings ola ili y wi hin he Eu opean indus ial
sec o . By concen a ing on ope a ing income da a du ing he speci ied pe iod, we aim
Economies 2024,12, 132 15 o 17
o accoun ing p ac ices in managing unce ain y. By ocusing on o al in angible asse s
a he han speci ic in es men s like R&D expendi u es, we ex end p e ious esea ch and
con i m he IFRS condi ion ega ding he ecogni ion o asse s based on hei po en ial
o gene a e u u e bene i s. Addi ionally, ou analysis o di e en accoun ing ea men s
p o ides insigh s in o hei implica ions o u u e ea nings ola ili y. We also expand
beyond con en ional measu es by inco po a ing addi ional a iables such as goodwill and
p ope y, plan , and equipmen (PPE), and analyze da a om bo h HT and LT indus ies,
p o iding aluable sec o -speci ic insigh s.
Ou s udy’s implica ions a e mul i ace ed. Fo inancial managemen p ac ices, ou
indings sugges ha i ms should ca e ully conside he impac o in angible and angible
in es men s on u u e ea nings ola ili y, wi h capi alizing in angible asse s po en ially
o e ing mo e s abili y compa ed o expensing hem. This insigh can in o m asse po olio
managemen and inancial epo ing s a egies. Mo eo e , ou s udy unde sco es he
impo ance o accoun ing s anda ds, p o iding empi ical suppo o exis ing p ac ices like
IAS 16 and 38. In es o s should also ake no e, as indus ies wi h high in angible asse s may
exhibi g ea e ea nings ola ili y, in luencing in es men isk. Las ly, ou sec o -speci ic
insigh s o e ailo ed guidance o indus y s akeholde s, aiding in he de elopmen o
s a egies o manage ea nings unce ain y e ec i ely.
While ou s udy p o ides aluable insigh s, i is no wi hou limi a ions. The una ail-
abili y o da a beyond 2020 and he ocus on he Eu opean inancial ma ke may limi he
gene alizabili y o ou indings. Addi ionally, a ia ions in inancial da a and accoun ing
p ac ices ac oss companies and indus ies may impac he consis ency and accu acy o
ou esul s. Fu u e esea ch endea o s could add ess hese limi a ions by expanding he
analysis o include da a om o he egions and ma ke s, inco po a ing mo e ecen da a,
and explo ing he impac o ex e nal ac o s on in es men s and ea nings ola ili y. Addi-
ionally, explo ing he impac o he cha ac e is ics o in angible and angible in es men s
on inancial analys s’ o ecas s and s ock ma ke ola ili y o e s an oppo uni y o deepen
ou unde s anding o in es men dynamics and ma ke eac ions. Such esea ch would
con ibu e signi ican ly o he ield o inancial managemen and asse alua ion.
Funding: This esea ch was unded by he Deanship o Scien i ic Resea ch, Vice P esidency o G ad-
ua e S udies and Scien i ic Resea ch, King Faisal Uni e si y, Saudi A abia, unde P ojec G an A053.
Ins i u ional Re iew Boa d S a emen : No applicable.
In o med Consen S a emen : No applicable.
Da a A ailabili y S a emen : The da a p esen ed in his s udy a e a ailable om he au ho upon
easonable eques .
Con lic s o In e es : The au ho decla es no con lic s o in e es .
Appendix A
Table A1. Va iable de ini ions.
Va iable De ini ion
Dependen a iable
SDOI
Fu u e ea nings ola ili y calcula ed as he s anda d de ia ion o
ope a ing income pe sha e be o e dep ecia ion, amo iza ion,
ad e ising, and R&D, om + 1 o + 5 (compus a da a #13 + da a
#45 + da a #46), de la ed by he beginning o he pe iod s ock p ice
(da a #199).
Economies 2024,12, 132 16 o 17
Table A1. Con .
Va iable De ini ion
Independen a iables
IA Balance shee in angible asse s (da a #33) a he end o yea .
CAPEX
Tangible ixed asse s measu ed by capi al expendi u es (da a #128) a
he end o yea , de la ed by lagged ma ke alue o equi y (MV). MV
is calcula ed as he iscal yea -end sha e p ice mul iplied by he
common sha es ou s anding (da a #199 * da a #54).
RD Resea ch and de elopmen expenses (da a #46) a he end o yea ,
de la ed by lagged MV.
AD Ad e ising expenses (da a #45) a he end o yea , de la ed by
lagged MV.
Con ol a iables
SIZE The i m size, de ined as he loga i hm o MV a he end o yea .
LEV
Financial le e age, calcula ed by adding long- e m deb (i em #9) and
he cu en po ion o long- e m deb (i em #34), hen di iding his
sum by he o al o long- e m deb , he cu en po ion o long- e m
deb , and MV.
Robus ness es a iables
GDWILL Goodwill a he end o yea (da a# 204), de la ed by lagged MV.
PPE
P ope y, plan , and equipmen a e calcula ed as he ne PPE (da a #8)
a he end o yea , de la ed by he lagged MV.
Appendix B
Table A2. No mali y es –Kolmogo o –Smi no Z.
Asymp Sign
SDOI 0.091
IA 0.176
CAPEX 0.101
RD 0.182
AD 0.205
LEV 0.139
SIZE 0.083
Sign > 0.05 implies no mali y.
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