The impact of research and development expenditure on financial performance: Evidence from large scale enterprises in Sri Lanka

The intensive competitive pressure on business firms has increased the importance of Research and Development (R&D) activities for them to be able to survive in the market place. The purpose of this research is to identify the impact of expensed and capitalized R&D on the financial performance of a firm. A sample of 105 firms that were selected from publicly listed companies that implement R&D activities. The random and stratified sampling techniques were adopted and the multivariate quantitative technique was selected to analyze their performance using several key financial indicators. The results revealed that expensed R&D positively associates with Dividend Cover Ratio (DCR), negatively associates with Earnings Per Share (EPS) with a substantial impact. The capitalized R&D has substantial negative association on Return On Assets Ratio (ROAR), Return On Capital Employed (ROCE) and EPS. The expensed and capitalized R&D showed insubstantial positive or negative impact on other financial indicators. These findings contribute towards the effective policy decisions of the firms.