Evidence on the Usefulness of Capitalizing and Amortizing Research and Development Costs

39 Pages Posted: 11 Feb 1998

See all articles by Dennis J. Chambers

Dennis J. Chambers

Kennesaw State University

Ross Jennings

University of Texas at Austin - Department of Accounting

Robert B. Thompson

American University

Date Written: January 1998

Abstract

In this paper, we provide evidence on the potential informational benefits of capitalizing and amortizing R&D costs by comparing the extent to which financial statements that reflect alternative R&D accounting schemes explain the cross-sectional distribution of share prices. We find that adjusting reported earnings and book values to reflect capitalization and amortization of R&D costs according to a one-size-fits-all accounting rule results in a small but statistically significant increase in the extent to which those measures explain the distribution of share prices. This improvement is even greater when the amortization period for R&D costs is allowed to vary across industry groups. However, when the R&D components of earnings and book values are disaggregated in order to permit them to relate to prices differentially, the difference in explanatory power between reported and adjusted accounting numbers is substantially reduced. Finally, we find that slope coefficients relating R&D expense to price do not differ significantly from those relating depreciation to price, and that slope coefficients for the R&D asset do not differ significantly from those for property, plant, and equipment. These results suggest that even simple capitalization and amortization rules for R&D costs that allow little discretion have the potential to increase the usefulness of accounting numbers as a basis for valuation.

JEL Classification: M41, M44, O30, G12

Suggested Citation

Chambers, Dennis J. and Jennings, Ross and Thompson, Robert B., Evidence on the Usefulness of Capitalizing and Amortizing Research and Development Costs (January 1998). Available at SSRN: https://ssrn.com/abstract=58661 or http://dx.doi.org/10.2139/ssrn.58661

Dennis J. Chambers (Contact Author)

Kennesaw State University ( email )

560 Parliament Garden Way
MD #0402
Kennesaw, GA 30144
United States
470-578-6375 (Phone)
470-578-9018 (Fax)

Ross Jennings

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-471-5340 (Phone)
512-471-3904 (Fax)

Robert B. Thompson

American University ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States

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