Value Relevance of R&D Reporting : A Signaling Interpretation
AbstractAccounting 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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Bibliographic InfoPaper provided by ESSEC Research Center, ESSEC Business School in its series ESSEC Working Papers with number DR 03021.
Length: 49 pages
Date of creation: Jul 2003
Date of revision:
Value relevance; R&D; France; Financial reporting; Capital markets; Accounting choice;
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; Research and Development; Intellectual Property Rights - - - 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)
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