The capitalization, amortization, and value-relevance of R&D

The capitalization, amortization, and value-relevance of R&D GAAP mandates the full expensing of R&D in financial statements, presumably because of concerns with the reliability, objectivity, and value-relevance of R&D capitalization. To address these concerns, we estimate the R&D capital of a large sample of public companies and find these estimates to be statistically reliable and economically meaningful. We then adjust the reported earnings and book values of sample firms for the R&D capitalization and find that such adjustments are value-relevant to investors. Finally, we document a significant intertemporal association between firms' R&D capital and subsequent stock returns, suggesting either a systematic mispricing of the shares of R&D-intensive companies, or a compensation for an extra-market risk factor associated with R&D. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting and Economics Elsevier

The capitalization, amortization, and value-relevance of R&D

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Publisher
Elsevier
Copyright
Copyright © 1996 Elsevier Ltd
ISSN
0165-4101
D.O.I.
10.1016/0165-4101(95)00410-6
Publisher site
See Article on Publisher Site

Abstract

GAAP mandates the full expensing of R&D in financial statements, presumably because of concerns with the reliability, objectivity, and value-relevance of R&D capitalization. To address these concerns, we estimate the R&D capital of a large sample of public companies and find these estimates to be statistically reliable and economically meaningful. We then adjust the reported earnings and book values of sample firms for the R&D capitalization and find that such adjustments are value-relevant to investors. Finally, we document a significant intertemporal association between firms' R&D capital and subsequent stock returns, suggesting either a systematic mispricing of the shares of R&D-intensive companies, or a compensation for an extra-market risk factor associated with R&D.

Journal

Journal of Accounting and EconomicsElsevier

Published: Feb 1, 1996

References

  • The cross-section of expected stock returns
    Fama, E.; French, K.
  • Competitive decline and corporate restructuring: Is a myopic stock market to blame?
    Woolridge, R.

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