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Research and development investments, development costs capitalization, and credit ratings: Exploratory evidence from UK R&D-active private firms

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  • Brasch, Annika
  • Eierle, Brigitte
  • Jarvis, Robin

Abstract

This exploratory study investigates research and development (R&D), specifically the relationship between development costs capitalization and the credit ratings of R&D-active private companies. Results indicate that uncertainty surrounding R&D investment is a leading factor in the credit risk assessment of R&D-active private companies. Hence, R&D intensity is seen as negatively impacting credit ratings. Although credit rating assessors are generally more concerned about downside risks, they seem to take into account different degrees of uncertainty. Consequently, our findings reveal that capitalized development projects that signal likely future economic benefits lead to better creditworthiness. Moreover, we infer from our additional analyses that credit rating assessors do consider the reasons of R&D-active private companies for capitalizing development costs. This conclusion is derived from evidence that discretionary capitalization ratios employed in opportunistic earnings management do have a significantly negative association with credit ratings. Conversely, non-discretionary counterparts have a significantly positive effect.

Suggested Citation

  • Brasch, Annika & Eierle, Brigitte & Jarvis, Robin, 2022. "Research and development investments, development costs capitalization, and credit ratings: Exploratory evidence from UK R&D-active private firms," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 48(C).
    • Handle: RePEc:eee:jiaata:v:48:y:2022:i:c:s1061951822000404
    DOI: 10.1016/j.intaccaudtax.2022.100485
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    More about this item

    Keywords

    Private firms; Accounting policy choice; R&D investment; Development costs capitalization; Credit rating;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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