Capitalization of R&D Costs and Earnings Management: Evidence from Italian Listed Companies

43 Pages Posted: 5 Oct 2007

See all articles by Lorenzo Pozza

Lorenzo Pozza

Bocconi University - Department of Accounting

Annalisa Prencipe

Bocconi University - Department of Accounting

Garen Markarian

HEC - University of Lausanne

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

Pozza, Lorenzo and Prencipe, Annalisa and Markarian, Garen, Capitalization of R&D Costs and Earnings Management: Evidence from Italian Listed Companies (October 1, 2007). Available at SSRN: https://ssrn.com/abstract=1019123 or http://dx.doi.org/10.2139/ssrn.1019123

Lorenzo Pozza

Bocconi University - Department of Accounting ( email )

Via Roentgen 1
Milan, 20136
Italy

Annalisa Prencipe (Contact Author)

Bocconi University - Department of Accounting ( email )

Via Roentgen 1
Milan, 20136
Italy

Garen Markarian

HEC - University of Lausanne ( email )

UNIL Dorigny
Lausanne, Lausanne 1015
Switzerland

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