Capitalization of In-Process Research and Development Under SFAS 141R and Information Asymmetry
Contemporary Accounting Research
45 Pages Posted: 9 Oct 2015 Last revised: 9 Jan 2019
Date Written: January 2, 2019
This study examines the effect of capitalizing acquired in-process research and development (IPR&D) on information asymmetry under the Statement of Financial Accounting Standard No. 141 (R). SFAS 141R requires acquirers to fully recognize IPR&D at fair value as an indefinite-lived intangible asset until completion or discontinuation of the project. Using a difference-in-difference research design, we find bid-ask spreads of IPR&D acquirers are higher in the post-SFAS 141R period, relative to non-IPR&D acquirers, suggesting increased information asymmetry of IPR&D acquirers under the new capitalization requirement. Alternative measures of information asymmetry provide consistent inferences. Additional analyses indicate earnings management through asset-classification shifting between IPR&D and goodwill is an explanation for the increase in information asymmetry. Overall, our evidence is consistent with IPR&D acquirers strategically using the additional reporting discretion afforded them under SFAS 141R in ways that degraded the information environment. As such, our evidence is relevant to the deliberations regarding whether capitalizing or expensing is the most appropriate method to account for R&D expenditures.
Keywords: SFAS 141R, in-process R&D, goodwill, information asymmetry
JEL Classification: M4, O3, G14
Suggested Citation: Suggested Citation