Accounting Choice and Future Performance: The Case of R&D Accounting in France

Posted: 18 Sep 2017

See all articles by Anne Jeny

Anne Jeny

ESSEC Business School; ESSEC Business School - Department of Accounting and Management Control

Thomas Jeanjean

ESSEC Business School - Department of Accounting and Management Control

Peter R. Joos

INSEAD

Date Written: 2011

Abstract

We examine whether managers’ decisions to capitalize or expense R&D expenditures convey information about the future performance of the firm. Focusing on a French setting where managers can choose to capitalize R&D expenditures under certain circumstances, we find that, after controlling for industry effects, firms that capitalize R&D expenditures spend less on R&D, have more volatile R&D efforts, and are smaller and more leveraged than firms that expense R&D expenditures. We also find that capitalizers capitalize R&D outlays when they need to meet or beat thresholds.

Finally, we show that the decision to capitalize R&D is generally associated with a negative or neutral impact on future performance, even after controlling for self-selection. Our results also show that when firms both capitalize and expense R&D expenditures, the expensed portion exhibits a stronger (and negative) relationship with future performance. Market-based tests corroborate these findings. While we cannot unambiguously establish whether our findings imply that management uses R&D capitalization to manage earnings or because it is unable to estimate the earning power of R&D projects, our results suggest that management is unable to truthfully convey information about future performance through its decision to capitalize R&D. Our findings, based on real data as opposed to simulated data, therefore contrast with previous supportive evidence in favor of capitalization in the literature.

Keywords: R&D, capitalization, signaling

Suggested Citation

Jeny, Anne and Jeanjean, Thomas and Joos, Peter R., Accounting Choice and Future Performance: The Case of R&D Accounting in France (2011). Journal of Accounting and Public Policy, Vol. 30, No. 2, 2011. Available at SSRN: https://ssrn.com/abstract=3036815

Anne Jeny (Contact Author)

ESSEC Business School ( email )

Av Bernard Hirsch
BP 50105
Cergy-Pontoise, 95021
France

ESSEC Business School - Department of Accounting and Management Control ( email )

Av Bernard Hirsch
BP 50105
Cergy-Pontoise, 95021
France

Thomas Jeanjean

ESSEC Business School - Department of Accounting and Management Control ( email )

Av Bernard Hirsch
Cergy-Pontoise 95021
France

Peter R. Joos

INSEAD ( email )

1 Ayer Rajah Avenue
Singapore, 138676
Singapore

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