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The negative impact of R&D capitalization: A value relevance approach

  • Anne Cazavan-Jeny
  • Thomas Jeanjean

Accounting for R&D costs is an open issue. SFAS N�2 mandates that all R&D costs must be immediately expensed. IAS 38 requires capitalization of R&D costs if they meet certain criteria. Recent research papers show the value relevance of capitalized R&D. We test the value relevance of R&D reporting in a sample of 197 French firms between 1993 and 2002. The French context provides an interesting field for R&D value relevance studies because both accounting treatments of R&D costs (expensing and capitalization) are allowed. Unlike previous studies, we find that capitalized R&D is negatively associated with stock prices and returns. This negative coefficient on capitalized R&D implies that investors are concerned with and react negatively to capitalization of R&D. We also find that the firms choosing to capitalize (successful) R&D are smaller, more highly leveraged, less profitable and have less growth opportunities. Taking into account these characteristics, our robustness checks confirm that capitalized R&D is not associated with higher prices and is related to lower returns.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/09638180500510384
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Article provided by Taylor & Francis Journals in its journal European Accounting Review.

Volume (Year): 15 (2006)
Issue (Month): 1 ()
Pages: 37-61

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Handle: RePEc:taf:euract:v:15:y:2006:i:1:p:37-61
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