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

See all articles by Hyeesoo Hyun Chung

Hyeesoo Hyun Chung

California State University, Long Beach; Arizona State University (ASU) - School of Global Management and Leadership

Stephen A. Hillegeist

Arizona State University (ASU) - W. P. Carey School of Business, School of Accountancy

You-il (Chris) Park

University of Hawaii at Manoa - School of Accountancy

Jinyoung P. Wynn

Louisiana Tech University - School of Professional Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: January 2, 2019

Abstract

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

Chung, Hyeesoo Hyun and Hillegeist, Stephen A. and Park, You-il (Chris) and Wynn, Jinyoung Park, Capitalization of In-Process Research and Development Under SFAS 141R and Information Asymmetry (January 2, 2019). Contemporary Accounting Research, Available at SSRN: https://ssrn.com/abstract=2671470 or http://dx.doi.org/10.2139/ssrn.2671470

Hyeesoo Hyun Chung

California State University, Long Beach ( email )

1250 Bellflower Blvd.
Long Beach, CA 90840
United States

Arizona State University (ASU) - School of Global Management and Leadership ( email )

P.O. Box 37100
Phoenix, AZ 85069
United States

Stephen A. Hillegeist (Contact Author)

Arizona State University (ASU) - W. P. Carey School of Business, School of Accountancy ( email )

Tempe, AZ 85287-3706
United States
480-965-6614 (Phone)

You-il (Chris) Park

University of Hawaii at Manoa - School of Accountancy ( email )

2404 Maile Way
Honolulu, HI 96822
United States
8089567028 (Phone)

HOME PAGE: http://shidler.hawaii.edu/chris-park

Jinyoung Park Wynn

Louisiana Tech University - School of Professional Accountancy ( email )

Ruston, LA 71272
United States
(318) 257-3948 (Phone)
(318) 257-4253 (Fax)

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