The Information Benefits of R&D Capitalization

42 Pages Posted: 14 Apr 2017 Last revised: 1 May 2017

See all articles by Dennis R. Oswald

Dennis R. Oswald

University of Michigan - Ross School of Business

Ana Vidolovska Simpson

London School of Economics & Political Science - Department of Accounting

Paul Zarowin

New York University (NYU) - Department of Accounting

Date Written: April 13, 2017

Abstract

We examine the information benefits of R&D capitalization in the UK after the adoption of IFRS (which mandates capitalization of development costs). Using the successful efforts model of Healy et al (2002), we examine whether information provided by capitalization helps to explain current stock returns, and to predict future earnings. We also examine whether the market could deduce the unrecognized capitalization information under expensing, by examining the market’s pricing of pro-forma capitalization information from the year before IFRS. We find that the capitalization variables have significant explanatory power for both returns and earnings, that the market values the decomposition of current R&D expenditures into their expensed vs capitalized components, and that firms’ switch to capitalization under IFRS revealed new information to the market. Together, these results attest to both the relevance and reliability of the capitalization information, and to the importance of its recognition.

Keywords: resaearch and development, capitalization, relevance, reliability

JEL Classification: G14, M41

Suggested Citation

Oswald, Dennis R. and Simpson, Ana and Zarowin, Paul, The Information Benefits of R&D Capitalization (April 13, 2017). Available at SSRN: https://ssrn.com/abstract=2952388 or http://dx.doi.org/10.2139/ssrn.2952388

Dennis R. Oswald

University of Michigan - Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109-1234
United States

Ana Simpson

London School of Economics & Political Science - Department of Accounting ( email )

United Kingdom

Paul Zarowin (Contact Author)

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street, Suite 400
422 Tisch Hall
New York, NY 10012-1118
United States
212-998-0015 (Phone)
212-995-4004 (Fax)

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