Conservative Accounting and the Pricing of Risk: The Case of Research and Development
37 Pages Posted: 25 Jul 2017 Last revised: 6 Jun 2019
Date Written: April 30, 2019
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: Suggested Citation