Capitalization of R&D Costs and Earnings Management: Evidence from Italian Listed Companies
43 Pages Posted: 5 Oct 2007
Date Written: October 1, 2007
Abstract
The capitalization of research and development (R&D) costs is a controversial accounting issue because of the contention that such capitalization is motivated by incentives to manipulate earnings. Based on a sample of Italian listed companies, this paper examines whether companies' decisions to capitalize R&D costs are affected by earnings management motivations. Italy provides a natural context for testing our hypothesized relationships because Italian GAAP allows for the capitalization of R&D costs. Using a Tobit regression model to test our hypotheses, we show that companies tend to use cost capitalization for earnings-smoothing purposes. The hypothesis that firms capitalize R&D costs in order to reduce the risk of violating debt covenants is not supported.
Keywords: income smoothing, earnings management, R&D capitalization, cost capitalization, Research and Development
JEL Classification: M41, M43, M44, M47, G32
Suggested Citation: Suggested Citation
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