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Value relevance of R&D reporting: a signalling interpretation

Author

Listed:
  • Thomas Jeanjean

    () (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Anne Cazavan-Jeny

    (Accounting / Management Control Department - Essec Business School)

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 empirically 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.

Suggested Citation

  • Thomas Jeanjean & Anne Cazavan-Jeny, 2003. "Value relevance of R&D reporting: a signalling interpretation," Working Papers hal-00592028, HAL.
  • Handle: RePEc:hal:wpaper:hal-00592028
    Note: View the original document on HAL open archive server: https://hal-hec.archives-ouvertes.fr/hal-00592028
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    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Baruch Lev & Theodore Sougiannis, 1999. "Penetrating the Book-to-Market Black Box: The R&D Effect," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(3-4), pages 419-449.
    3. 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.
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    6. 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.
    7. repec:bla:joares:v:38:y:2000:i:1:p:1-21 is not listed on IDEAS
    8. Hirschey, Mark, 1982. "Intangible Capital Aspects of Advertising and R&D Expenditures," Journal of Industrial Economics, Wiley Blackwell, vol. 30(4), pages 375-390, June.
    9. 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.
    10. 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.
    11. repec:bla:joares:v:37:y:1999:i:2:p:319-352 is not listed on IDEAS
    12. Yuan Ding & Hervé Stolowy, 2003. "" Capitalisation " Des Frais De R&D En France : Determinants Et Pertinence," Post-Print halshs-00582768, HAL.
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    1. repec:kap:rqfnac:v:50:y:2018:i:4:d:10.1007_s11156-017-0657-6 is not listed on IDEAS
    2. Riccardo Cimini & Alessandro Gaetano & Alessandra Pagani, 2014. "The relation between R&D accounting treatment and the risk of the firm: Evidence from the Italian market," FINANCIAL REPORTING, FrancoAngeli Editore, vol. 2014(1), pages 33-54.
    3. Schmidt, Gabriela & Trofimenko, Natalia, 2010. "Linkages between technology choice and exporting: Evidence from Argentina," Kiel Working Papers 1620, Kiel Institute for the World Economy (IfW).
    4. Gamal Atallah & Massoud Khazabi, 2005. "A Model of R&D Capitalization," International Journal of Business and Economics, College of Business and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 4(2), pages 107-121, August.
    5. Salma Loulou & Mohamed Triki, 2008. "Déterminants et pertinence de l'activation des dépenses de recherche & développement dans le contexte des entreprises françaises," Post-Print halshs-00525992, HAL.

    More about this item

    Keywords

    value relevance; R&D; France; financial reporting; capital markets; accounting choice;

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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