Prior research finds that R&D expenditures have a positive and significant relationship with both current and future stock returns. If information about future economic benefits of R&D expenditures is fully impounded in current stock prices, there will be no significant relation between R&D expenditures and future stock returns. Thus, the significantly positive relation between R&D expenditures and future stock returns is regarded as an exception of the semistrong form efficient market hypothesis. Prior research argues that the US accounting requirements to immediately expense R&D expenditures cause the positive relation between R&D expenditures and future stock returns and therefore suggests capitalization of R&D expenditures. Unlike the US accounting standards, the Korean accounting standards allow capitalization of R&D expenditures under the condition that R&D expenditures satisfy the capitalization criteria. Hence, this study examines whether the positive relation between R&D expenditures and future stock returns disappears when R&D expenditures are capitalized using the Korean sample. The results reveal that a positive relation between R&D expenditures and future stock returns is observed for the entire sample even when R&D expenditures are capitalized. When we conduct analysis by the market, we find no significant relation between capitalized R&D expenditures and future stock returns for the KOSPI market. However, we find a significantly positive association between capitalized R&D expenditures and future stock returns for the less efficient KOSDAQ market. Expensed R&D expenditures are positively associated with future stock returns in both markets. Furthermore, the results also reveal that foreign ownership mitigates the R&D anomaly. Our results suggest that both R&D capitalization and market efficiency are necessary for the market to fully reflect the future earnings implication of R&D expenditures in the current stock returns.