Conservative Accounting and the Pricing of Risk: The Case of Research and Development

37 Pages Posted: 25 Jul 2017 Last revised: 6 Jun 2019

See all articles by Dimos Andronoudis

Dimos Andronoudis

University of Bristol - Department of Finance and Accounting

Christina Dargenidou

University of Exeter Business School - XFI Centre for Finance and Investment

Eirini Konstantinidi

University of Manchester - Manchester Business School

Peter F. Pope

Bocconi University; London School of Economics and Political Science

Date Written: April 30, 2019

Abstract

The rationale for conservatively expensing R&D investments under U.S. GAAP largely relies on the uncertainty of the R&D-related future benefits. We examine the temporal dimension of uncertainty reflecting the time distance between R&D expenditures and the realization of future benefits. We propose a new measure capturing the temporal dimension of uncertainty due to conservative accounting, excess duration. Within an Intertemporal Capital Asset Pricing (ICAPM) framework, we find that excess duration is positively related to priced risk through systematic discount rate risk. We verify that the ICAPM accommodates priced risk related to excess duration. Conservative R&D accounting communicates risk on the distance to uncertainty resolution that is priced by the equity market through systematic discount rate risk.

Keywords: R&D, Conservative Accounting, Duration, ICAPM.

JEL Classification: G12, G14, M40, M41, N22

Suggested Citation

Andronoudis, Dimos and Dargenidou, Christina and Konstantinidi, Eirini and Pope, Peter F., Conservative Accounting and the Pricing of Risk: The Case of Research and Development (April 30, 2019). Available at SSRN: https://ssrn.com/abstract=3006537 or http://dx.doi.org/10.2139/ssrn.3006537

Dimos Andronoudis

University of Bristol - Department of Finance and Accounting ( email )

1.04, 15-19 Tyndalls Park Road,
The Priory Road Complex, Priory Road,
Bristol, Avon BS8 1TU
United Kingdom
+44(0)117 394 1504 (Phone)

Christina Dargenidou

University of Exeter Business School - XFI Centre for Finance and Investment ( email )

University of Exeter
Xfi Building, Rennes Dr.
Exeter, EX4 3BZ
United Kingdom

Eirini Konstantinidi

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Peter F. Pope (Contact Author)

Bocconi University ( email )

Dept of Accounting
Milan, 20136
Italy

London School of Economics and Political Science ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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