Value Relevance of R&D Reporting : A Signaling Interpretation

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Value Relevance of R&D Reporting : A Signaling Interpretation

Author Info

Cazavan-Jeny , Anne () (ESSEC Business School)
Jeanjean, Thomas () (HEC)

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Abstract

Accounting for research and development (R&D) costs is an open issue. SFAS N°2 mandates that all R&D costs are immediately expensed. International standards prescribe a capitalization of R&D costs if they meet certain criteria (IAS 38). Recent research papers (Healy et al., 2002; Lev and Sougiannis, 1996, 1999; Aboody and Lev, 1998, Zhao, 2002) show that capitalization of R&D costs and software development costs is value relevant. However critics can be leveled at previous research because prior empirical tests are based on simulated or partial data. Our purpose is to test empically R&D accounting issues on a sample of 95 French firms on a three years period (1998-2000). French context provides an experimental field for studying the value relevance of R&D capitalization, because both accounting treatments of R&D costs (expensing and capitalization) are allowed. We find that capitalized R&D is positively associated with stock returns and stock prices, whereas expensed R&D is negatively related to stock prices and stock returns. R&D accounting reduces the information asymmetry on the successfulness of R&D projects: it acts as a signal to investors.

This paper extends previous literature by using real data on capitalized R&D, instead of estimated data. Moreover, we show not only that capitalized R&D is value relevant but also that expensing of R&D projects conveys a negative signal.

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Paper provided by ESSEC Research Center, ESSEC Business School in its series ESSEC Working Papers with number DR 03021.

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Length: 49 pages
Date of creation: Jul 2003
Date of revision:
Handle: RePEc:ebg:essewp:dr-03021

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Find related papers by JEL classification:
M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
O32 - Economic Development, Technological Change, and Growth - - Technological Change - - - Management of Technological Innovation and R&D

This paper has been announced in the following NEP Reports:

NEP-ALL-2003-11-09 (All new papers)
NEP-INO-2003-11-09 (Innovation)
NEP-TID-2003-11-09 (Technology & Industrial Dynamics)

References listed on IDEAS
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Hirschey, Mark, 1982. "Intangible Capital Aspects of Advertising and R&D Expenditures," Journal of Industrial Economics, Blackwell Publishing, vol. 30(4), pages 375-90, June. [Downloadable!] (restricted)
Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June. [Downloadable!] (restricted)
Louis K. C. Chan, 2001. "The Stock Market Valuation of Research and Development Expenditures," Journal of Finance, American Finance Association, vol. 56(6), pages 2431-2456, December. [Downloadable!] (restricted)
Barth, Mary E. & Beaver, William H. & Landsman, Wayne R., 2001. "The relevance of the value relevance literature for financial accounting standard setting: another view," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 77-104, September. [Downloadable!] (restricted)
Holthausen, Robert W. & Watts, Ross L., 2001. "The relevance of the value-relevance literature for financial accounting standard setting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 3-75, September. [Downloadable!] (restricted)
Robert E. Verrecchia & Christian Leuz, 1999. "The Economic Consequences of Increased Disclosure," Working Paper Series: Finance and Accounting 41, Department of Finance, Goethe University Frankfurt am Main. [Downloadable!]
Baruch Lev & Theodore Sougiannis, 1999. "Penetrating the Book-to-Market Black Box: The R&D Effect," Journal of Business Finance & Accounting, Blackwell Publishing, vol. 26(3-4), pages 419-449. [Downloadable!] (restricted)
Boone, Jeff P. & Raman, K. K., 2001. "Off-balance sheet R&D assets and market liquidity," Journal of Accounting and Public Policy, Elsevier, vol. 20(2), pages 97-128. [Downloadable!] (restricted)

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