An Evaluation of the Causes and Consequences of In-Process Research and Development Restatements*

39 Pages Posted: 2 Oct 2005

Date Written: January 2006

Abstract

This paper uses several approaches to assess the impact of the Security and Exchange Commission's (SEC) scrutiny of firms' purchase accounting and in-process research and development (IPR&D) write-offs taken during 1997 and 1998. Using hand collected data, I examine the characteristics of firms choosing to overstate IPR&D and the market's reaction to the restatement events. I discuss the motivations for overstating IPR&D and find evidence of the association between firms using aggressive IPR&D allocations and relatively poor future performance. I use a partial observability probit model and find that firms with limited operating prospects which acquired firms with greater intangible premiums were more likely to overstate IPR&D. Finally, using methods to control for the contemporaneous correlation among the restatement announcements, I find that the market reaction to most IPR&D restating events is weak. Few firms report large negative price consequences to an IPR&D restatement; thus, investors are, for the most part, not misled by aggressive IPR&D practices as claimed by the SEC.

Keywords: In-Process Research and Development; Event Study

JEL Classification: G38, M41, M43, G12, G24

Suggested Citation

Banyi, Monica L., An Evaluation of the Causes and Consequences of In-Process Research and Development Restatements* (January 2006). AAA 2006 Financial Accounting and Reporting Section (FARS) Meeting Paper, Available at SSRN: https://ssrn.com/abstract=817507 or http://dx.doi.org/10.2139/ssrn.817507

Monica L. Banyi (Contact Author)

Gonzaga University ( email )

United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
389
Abstract Views
2,713
rank
87,130
PlumX Metrics