The Capitalization of Intangibles and Managerial Information

41 Pages Posted: 16 Jan 2012

Date Written: January 15, 2012


In this study, I investigate whether managers’ capitalization of intangible expenditures conveys incremental information, about the amount and timing of future cash flows, to expensed intangible expenditures. I find the association between capitalized SD (Software Development) expenditures and future cash flows is stronger than the association between reported R&D expense and future cash flows for firms that capitalize. I also find that the association between R&D expenses and future cash flows is lower for firms that capitalize SD expenditures than it is for those firms that do not capitalize. This is consistent with the premise that firms who do not capitalize SD expenditures fail to provide stakeholders with private information about the future benefits of SD expenditures through capitalization. Further, firms that do capitalize and disclose longer amortization schedules provide information about the timing of these benefits. The positive relation between capitalized SD expenditures and future cash flows is stronger for firms with high analyst forecast dispersion and low analyst following; indicating managers may use the capitalization decision to convey private information when incentives to do so are higher. However, I find the association is lower for firms whose capitalized SD expenditures allows them to meet or beat analysts’ forecasts, consistent with managers using the capitalization decision opportunistically. These findings suggest that on average managers who capitalize SD expenditures use their private information to convey the future cash flow implications of SD expenditures; but that in some situations they may also use the capitalization decision opportunistically.

Keywords: Intangible assets, capitalization, FASB, IASB, private information, earnings management, uncertainty

JEL Classification: M41

Suggested Citation

Wolfe, Mindy, The Capitalization of Intangibles and Managerial Information (January 15, 2012). CAAA Annual Conference 2012. Available at SSRN: or

Mindy Wolfe (Contact Author)

University of Waterloo ( email )

200 University Avenue West
Waterloo, Ontario
519-888-4567 ext 38899 (Phone)

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