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Expensing Versus Capitalization

Author

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  • Tong Lu
  • Konduru Sivaramakrishnan

Abstract

We develop a theoretical framework to study the effects of expensing versus capitalization of investment expenditures on capital market asset prices, corporate investment, and investment efficiency. We use a two‐period model in which the financial reports at the end of the first period influence the price of the firm. In the first period, the current owner makes an investment decision that yields returns during the first and the second periods. We highlight the benefits and costs of the matching principle in GAAP and identify conditions under which less disclosure improves investment efficiency. We find that, in terms of investment efficiency, expensing beats capitalization if and only if the expected growth rate is high, the growth volatility is large, or the earnings persistence is small. We also offer testable empirical implications for accounting choice and for real earnings management. Les auteurs élaborent un cadre théorique destiné à l'étude des répercussions de la passation en charges ou de l'inscription au bilan des dépenses en immobilisations sur l'évaluation des actifs sur le marché, les investissements des entreprises et l'efficience des investissements. Ils utilisent un modèle à deux périodes dans lequel les rapports financiers à la fin de la première période influent sur l'évaluation de l'entreprise. Dans la première période, le propriétaire existant prend une décision d'investissement qui engendre des rendements au cours des première et seconde périodes. Les auteurs mettent en relief les avantages et les coûts du principe de rattachement des charges aux produits dans les PCGR et définissent les conditions dans lesquelles la communication d'une moins grande quantité d'informations améliore l'efficience des investissements. Ils constatent qu'en ce qui a trait à l'efficience des investissements, la passation en charges surpasse l'inscription au bilan si, et seulement si, le taux de croissance prévu est élevé, la volatilité de la croissance est importante, ou la persistance du résultat est faible. Ils suggèrent également des conséquences empiriques vérifiables dans les domaines des choix comptables et de la gestion du résultat réel.

Suggested Citation

  • Tong Lu & Konduru Sivaramakrishnan, 2018. "Expensing Versus Capitalization," Contemporary Accounting Research, John Wiley & Sons, vol. 35(3), pages 1262-1278, September.
  • Handle: RePEc:wly:coacre:v:35:y:2018:i:3:p:1262-1278
    DOI: 10.1111/1911-3846.12333
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