Download this Paper Open PDF in Browser

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

36 Pages Posted: 25 Jul 2017  

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

London School of Economics & Political Science (LSE)

Date Written: July 21, 2017

Abstract

We propose and test an economic channel through which conservative accounting conveys information on the resolution of cash flow uncertainty and systematic risk related to research and development (R&D) expenditure. By expensing R&D, conservative accounting aims to convey information about the stage of uncertainty resolution and the term-structure of uncertain expected earnings. Our analysis establishes a link between reported information on R&D activity, equity duration and discount rate risk within an Intertemporal Capital Asset Pricing (ICAPM) framework. Consistent with our predictions, we find that equity duration and discount rate betas are higher for R&D intensive firms. In contrast, cash flow betas do not depend on R&D intensity. Our results also suggest that the equity market prices the systematic risk associated with R&D.

Keywords: R&D, Conservative Accounting, Duration, ICAPM, Discount Rate Beta, Cash Flow Beta.

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 (July 21, 2017). Available at SSRN: https://ssrn.com/abstract=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)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://www.lse.ac.uk/accounting/facultyAndStaff/profiles/Pope.aspx

Paper statistics

Downloads
43
Abstract Views
155