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Capitalizing research & development and ‘other information’: the incremental information content of accruals versus cash flows

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  • Tami Dinh Thi
  • Wolfgang Schultze

Abstract

This paper studies the role of the accrual process for providing value relevant information on intangibles. Expensing research & development (R&D) expenditures is, by nature, equivalent to cash accounting. Prior studies have found that accrual information has superior explanatory power for market values compared to cash flows (Dechow in J. Account. Econ. 18(1):3–42, 1994 ). We demonstrate, for a sample of German firms, that this also holds true for R&D accounting. By adjusting the earnings we create two samples reflecting R&D capitalization and expensing, respectively. We demonstrate that capitalizing R&D expenditures creates an additional accrual component of earnings which increases the explanatory power of earnings compared to cash flows (expensing) while internalizing ‘other information’ into the accounting system. This explains the higher value relevance of capitalized R&D compared to expensing established in prior research (Lev and Sougiannis in J. Account. Econ. 21(1):107–138, 1996 ). Copyright Springer Verlag 2011

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  • Tami Dinh Thi & Wolfgang Schultze, 2011. "Capitalizing research & development and ‘other information’: the incremental information content of accruals versus cash flows," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 22(3), pages 241-278, November.
    • Handle: RePEc:spr:metrik:v:22:y:2011:i:3:p:241-278
    DOI: 10.1007/s00187-011-0137-4
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