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«Department of Accounting and Finance        Working Paper Series      AF2014/15WP05    ...»

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  Figure 1: ROE of pharmaceutical firms vs. ROE of firms in other industries in U.S.

(1972-2012) Figure 1 compares the ROE of pharmaceutical firms (with SIC codes 2833, 2834, 2835, and 2836) to the ROE of non-pharmaceutical firms in the U.S. Firms with missing data for main test variables and firms with negative book equity are excluded from the sample. Firm-year observations in the top and bottom 1 percentile of ROE distribution are deleted to minimize the impact of outliers.

.3.25.2 ROE.15.1.05

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  Figure 2: Difference in ROE between pharmaceutical firms and firms in other industries for international sample (1999-2012) The sample comprises 6 countries: Australia (AUS), Canada (CAN), India (IND), Japan (JAP), Sweden (SWE), and U.K. (GBR) over the period 1999-2012. ROE difference is the difference in weightedaverage ROE between the sample of pharmaceutical and non-pharmaceutical firms in a given year and country. Weights are set to the share of book equity in the total equity of pharmaceutical or nonpharmaceutical firms in each country-year.


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  Table 1: Effects of R&D accounting on ROE Table 1 compares two hypothetical pharmaceutical firms, A and B, with different accounting treatments for R&D. Both invest each year 100 into R&D and generate 115 in annual revenues. Both firms have a cash asset (30), some investment in R&D, and no liabilities. Firm A capitalizes 100% of R&D outlays and amortizes them over the next year. Firm B is allowed only to capitalize 10% of its R&D investments and must expense the remaining 90% of R&D investments when incurred.

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  Table 2: Accounting profitability of pharmaceutical and non-pharmaceutical firms Table 2 reports summary statistics on the accounting rates of return of pharmaceutical firms and non-pharmaceutical firms for firms in the U.S. (Panel A) and international sample (Panel B). We obtain a weighted average ROE (the ratio of net income to closing book equity) for each country and year, and set weights to the share of book equity in the total equity of pharmaceutical firms in each country-year. ROE_diff is the difference in weighted-average ROE between the sample of pharmaceutical and non-pharmaceutical firms in a given year and country. R&D_diff is the difference in weighted-average R&D expenditure between the sample of pharmaceutical and non-pharmaceutical firms in a given year and country.

Panel A. U.S. sample (1972-2012)

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  Table 3: Effect of R&D accounting on ROE Table 3 reports the estimated coefficients of equations (1) and (2). The dependent variable, ROE_diffit is the country’s i difference in weighted-average ROE between the sample of pharmaceutical and non-pharmaceutical firms in year t. R&D_diffit is the difference in weighted average R&D expenditure (the ratio of R&D expenditure to closing book equity) between the sample of pharmaceutical firms and the sample of non-pharmaceutical firms in year t. ΔGDPit is the annual change in GDP in country i and year t. The sample comprises U.S. firms over the period 1972-2012 and the international firms (Australia, Canada, India, Japan, Sweden, U.K.) over the period 1999-2012.

Columns (1) and (2) are OLS regressions, while columns (3) and (4) are estimated using country fixed effects. tstatistics use robust standard errors adjusted for heteroscedasticity and time series dependence and are reported in parentheses below coefficient estimates. ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively.

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  Table 4: ROE adjusted for the influence of R&D accounting Table 4 reports the rates of return (ROE) after adjusting earnings and equity for capitalization and amortization of R&D investments. ROE of pharmaceutical firms is adjusted for the effects of R&D accounting using three techniques: (i) linear amortization, (ii) declining balance, and (iii) empirical amortization rates. The lower part of the table reports ROE_diffit, the difference in weighted-average ROE between the sample of pharmaceutical and non-pharmaceutical firms as a result of the three types of adjustments.

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