294 CHANDRA KANODIA lending policies, and whether this, in turn, would affect interest rates and real investment in the economy. Similarly, consider the recent debate on the capitalization of intangible investments. A value-relevance study, of which there have been several, would estimate intangible investments, capitalize and amortize them, and examine their value relevance by testing whether the restated earnings and book values provide a better ﬁt with empirically observed returns in the capital market. (Since the data on security returns are drawn from a world where intangibles are not capitalized, the interpretation of such a study is problematic.) On the other hand, a real effects study would ask whether a reporting mandate to capitalize intangibles would alter ﬁrms’ incentives to invest in intangibles. This real effect could possibly arise through the pricing of intangible investments in the capital market. The question can equivalently be framed in terms of cost of capital. Is the cost of capital for intangible investments altered as a consequence of how intangibles are treated in the ﬁnancial statements? Notice that the real effects perspective argues that disclosure policy alters the very dis- tribution of the cash ﬂows about which that disclosure is seeking to provide
Review of Accounting Studies – Springer Journals
Published: Sep 30, 2004
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