Value Relevance of Accounting Information for Intangible-Intensive Industries and the Impact of Scale: The US Evidence

Posted: 29 May 2013 Last revised: 12 Jun 2013

Mustafa Ciftci

American University of Sharjah - School of Business and Management

Masako N. Darrough

City University of New York - Baruch College - Stan Ross Department of Accountancy

Raj Mashruwala

University of Calgary - Haskayne School of Business

Date Written: May 28, 2013

Abstract

The structural shift in the US from a tangible- to an intangible-intensive economy raises a concern that GAAP-based reporting might have lost its usefulness to investors. Amir and Lev (1996) argue that accounting information is not useful for intangible-intensive firms. In contrast, Collins et al. (1997) find that the value relevance (measured by R-squared) of accounting information has increased over time and that value relevance for intangible-intensive industries is as high as that for tangible-intensive industries. In this article we attempt to resolve the above discrepancy by examining the impact of scale on R-squared (Brown et al., 1999). We find that, after controlling for scale, R-squared is lower for intangible-intensive industries than for non-intangible-intensive industries and has declined over time for intangible-intensive industries but remained stable for non-intangible-intensive industries. Interestingly, the declining trend ended with the demise of the “New Economy” period (NEP) (Core et al., 2003), and value relevance for both industry groups appears to be restored in the post-NEP to the pre-NEP level. We also find that R&D capitalization increases value relevance for intangible-intensive industries, but does not completely eliminate the gap between the two groups.

Keywords: value relevance, intangibles, variation in scale, expensing versus capitalization

JEL Classification: M41, O30

Suggested Citation

Ciftci, Mustafa and Darrough, Masako N. and Mashruwala, Raj, Value Relevance of Accounting Information for Intangible-Intensive Industries and the Impact of Scale: The US Evidence (May 28, 2013). European Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2271384

Mustafa Ciftci (Contact Author)

American University of Sharjah - School of Business and Management ( email )

P.O. Box 26666
Sharjah
United Arab Emirates

Masako N. Darrough

City University of New York - Baruch College - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way
New York, NY 10010
United States
646 312 3183 (Phone)
646 312 3161 (Fax)

Raj Mashruwala

University of Calgary - Haskayne School of Business ( email )

2500 University Drive NW
Calgary, Alberta T2N 1N4
Canada
403-220-4332 (Phone)

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