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Capitalization of R&D costs and earnings management: Evidence from Italian listed companies

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  • Markarian, Garen
  • Pozza, Lorenzo
  • Prencipe, Annalisa
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    Abstract

    The capitalization of research and development (R&D) costs is a controversial accounting issue because of the contention that such capitalization is motivated by incentives to manipulate earnings. Based on a sample of Italian listed companies, this study examines whether companies' decisions to capitalize R&D costs are affected by earnings-management motivations. Italy provides a natural context for testing our hypothesized relationships because Italian GAAP allows for the capitalization of R&D costs. Using a Tobit regression model to test our hypotheses, we show that companies tend to use cost capitalization for earnings-smoothing purposes. The hypothesis that firms capitalize R&D costs to reduce the risk of violating debt covenants is not supported.

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    Bibliographic Info

    Article provided by Elsevier in its journal The International Journal of Accounting.

    Volume (Year): 43 (2008)
    Issue (Month): 3 (September)
    Pages: 246-267

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    Handle: RePEc:eee:accoun:v:43:y:2008:i:3:p:246-267

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    Web page: http://www.elsevier.com/locate/inca/620179

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    1. repec:hur:ijaraf:v:4:y:2014:i:2:p:30-41 is not listed on IDEAS
    2. Constant Djama & Guillaume Dumas & Isabelle Martinez, 2011. "L'innovation : une incitation à la gestion des résultats ?," Post-Print hal-00650418, HAL.
    3. repec:hur:ijaraf:v:4:y:2014:i:2:p:85-97 is not listed on IDEAS
    4. Guillaume Dumas, 2012. "Le Comportement Myopique D'Investissement En R&D : Une Realite En France ?," Post-Print hal-00690955, HAL.
    5. Rihab Guidara & Younes Boujelbene, 2014. "Earnings Management around Research and Development Manipulation," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(2), pages 26-37, April.
    6. Shah, Syed Zulfiqar Ali & Liang, Shuang & Akbar, Saeed, 2013. "International Financial Reporting Standards and the value relevance of R&D expenditures: Pre and post IFRS analysis," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 158-169.
    7. Rihab Guidara & Younes Boujelbene, 2014. "R&D-Based Earnings Management and Accounting Performance Motivation," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(2), pages 81-93, April.

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