R&D Accounting and the Tradeoff between Relevance and Objectivity

48 Pages Posted: 18 Feb 1999

See all articles by Paul M. Healy

Paul M. Healy

Harvard Business School; National Bureau of Economic Research (NBER)

Stewart C. Myers

Massachusetts Institute of Technology (MIT); National Bureau of Economic Research (NBER)

Christopher D. Howe

Massachusetts Institute of Technology

Date Written: January 1999

Abstract

This paper develops a simulation model for a pharmaceutical firm to provide evidence on the tradeoff between objectivity and relevance for several methods of reporting R&D outlays. The findings indicate that a simple capitalization rule, analogous to the successful efforts method of capitalizing oil and gas exploration costs, provides a significantly higher relation between accounting information and economic values than immediate expensing of R&D outlays or capitalizing the full cost of outlays. More importantly, our findings show that the relevance of successful efforts data persists even when there is widespread earnings management.

JEL Classification: M41, M44

Suggested Citation

Healy, Paul M. and Myers, Stewart C. and Howe, Christopher D., R&D Accounting and the Tradeoff between Relevance and Objectivity (January 1999). Available at SSRN: https://ssrn.com/abstract=147136 or http://dx.doi.org/10.2139/ssrn.147136

Paul M. Healy (Contact Author)

Harvard Business School ( email )

Soldiers Field
Boston, MA 02163
United States
617-495-1283 (Phone)
617-496-7387 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stewart C. Myers

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
Cambridge, MA 02142
United States
617-253-6696 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Christopher D. Howe

Massachusetts Institute of Technology

Sloan School of Management
Cambridge, MA 02142
United States
617-253-6576 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
2,533
Abstract Views
12,300
Rank
10,172
PlumX Metrics