Accounting for Software Development Costs and the Cost of Capital: Evidence from IPO Underpricing in the Software Industry

39 Pages Posted: 10 Jul 2007

See all articles by Dan Givoly

Dan Givoly

Pennsylvania State University, Smeal College of Business

Charles Shi

NUS Business School, National University of Singapore

Date Written: July 2007

Abstract

The paper assesses the value of the information contained in management's determination of the accounting treatment for software development costs. The assessment is made in the context of the initial public offerings (IPO) market and is based on the effect of the accounting treatment on information asymmetry and hence IPO underpricing. We hypothesize that by sharing information about the probability of recoverability of software development costs and the amortization period, management that elects capitalization reduces information asymmetry and thus underpricing. The results, based on a sample of 390 IPOs in the software industry, are consistent with the hypothesis. The findings suggest that the option to capitalize, through its information impact, lowers the cost of capital. Alternative interpretations of the findings are discussed as well.

Keywords: Accounting for software development costs (SDC), IPO underpricing, information asymmetry, cost of capital

JEL Classification: M41, M43, M44, G24, D82, G12, G14

Suggested Citation

Givoly, Dan and Shi, Charles, Accounting for Software Development Costs and the Cost of Capital: Evidence from IPO Underpricing in the Software Industry (July 2007). Available at SSRN: https://ssrn.com/abstract=999263 or http://dx.doi.org/10.2139/ssrn.999263

Dan Givoly

Pennsylvania State University, Smeal College of Business ( email )

305 Business Building
University Park, PA 16802
United States
814-865-0587 (Phone)
814-863-8393 (Fax)

Charles Shi (Contact Author)

NUS Business School, National University of Singapore ( email )

15 Kent Ridge Dr
Singapore, 119245
Singapore
65-65161678 (Phone)

HOME PAGE: http://bschool.nus.edu/Accounting/FacultyStaff/Facultymembers.aspx

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