Author
Listed:
- Cazavan-Jeny, Anne
- Jeanjean, Thomas
- Joos, Peter
Abstract
We examine whether managers' decisions to capitalize or expense R&D expenditures convey information about the future performance of the firm. Focusing on a French setting where managers can choose to capitalize R&D expenditures under certain circumstances, we find that, after controlling for industry effects, firms that capitalize R&D expenditures spend less on R&D, have more volatile R&D efforts, and are smaller and more leveraged than firms that expense R&D expenditures. We also find that capitalizers capitalize R&D outlays when they need to meet or beat thresholds. Finally, we show that the decision to capitalize R&D is generally associated with a negative or neutral impact on future performance, even after controlling for self-selection. Our results also show that when firms both capitalize and expense R&D expenditures, the expensed portion exhibits a stronger (and negative) relationship with future performance. Market-based tests corroborate these findings. While we cannot unambiguously establish whether our findings imply that management uses R&D capitalization to manage earnings or because it is unable to estimate the earning power of R&D projects, our results suggest that management is unable to truthfully convey information about future performance through its decision to capitalize R&D. Our findings, based on real data as opposed to simulated data, therefore contrast with previous supportive evidence in favor of capitalization in the literature.
Suggested Citation
Cazavan-Jeny, Anne & Jeanjean, Thomas & Joos, Peter, 2011.
"Accounting choice and future performance: The case of R&D accounting in France,"
Journal of Accounting and Public Policy, Elsevier, vol. 30(2), pages 145-165, March.
Handle:
RePEc:eee:jappol:v:30:y::i:2:p:145-165
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