Alternative Income Determination Rules and Earnings Usefulness: The Case of R&D Costs

Posted: 24 Feb 1998

See all articles by Martha Loudder

Martha Loudder

Texas A&M University - Department of Accounting

Bruce K. Behn

University of Tennessee, Knoxville - College of Business Administration

Abstract

Accounting procedures have been suggested as a factor affecting the usefulness of reported earnings for the users of financial statements. However little evidence exists to confirm the ways in which mandatory changes in income determination rules influence the way the market responds to accounting information. This study expands the existing literature by testing the notion that accounting method choice can affect earnings usefulness for firms engaged in research and development (R&) activities. We test hypotheses concerning: (1) changes in earnings usefulness for firms that switched their R&D accounting method as a result of SFAS No. 2; and (2) differences in earnings usefulness between similar firms using different R&D accounting methods prior to the rule change. We find that for our sample of R&D firms there is a statistically significant decline in earnings usefulness for firms forced to switch from capitalizing to expensing R&D outlays and that the decline appears to persist over time. In addition the comparison of earnings usefulness between firms using different R&D accounting methods before SFAS No. 2 indicates that capitalizing firms had significantly higher earnings usefulness than expensing firms.

JEL Classification: M41

Suggested Citation

Loudder, Martha and Behn, Bruce K., Alternative Income Determination Rules and Earnings Usefulness: The Case of R&D Costs. Available at SSRN: https://ssrn.com/abstract=55458

Martha Loudder (Contact Author)

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States
409-690-0634 (Phone)
409-845-0028 (Fax)

Bruce K. Behn

University of Tennessee, Knoxville - College of Business Administration ( email )

453 Haslam Business Building
Knoxville, TN 37996
United States
865-974-1760 (Phone)
865-974-4631 (Fax)

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