This paper helps explain a ‘puzzle’ about the scale benefits of R&D investment: although larger firms are less efficient innovators, they spend more on R&D investment and earn more from R&D investment. We find evidence suggesting that large firms enjoy a comparative advantage investing in R&D projects with less chance of success, although they do not experience such scale benefits from R&D investments with more chance of success. We capture managers’ evaluation of the chance of success of an R&D investment using an accounting choice to capitalise or expense the R&D investment. Our results have policy implications for the design of efficient and equitable allocations of R&D tax incentives between large and small firms, and for the usefulness to investors of allowing discretion in the accounting treatment of R&D expenditures.
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