Accounting and Finance Seminar - Dimos Andronoudis (University of Bristol)
G.15, 15-19 Tyndalls Park Road
Capitalization of R&D under IFRS: A Variance Decomposition Analysis
We exploit the conditional capitalization of R&D expenditure under IFRS to develop tests unravelling market valuation implications. We employ a return news variance decomposition to quantify the market uncertainty surrounding accounting information and additionally perform multivariate comparative analyses to gauge whether this market uncertainty is determined by the R&D accounting treatment and R&D capitalization intensity. Results show that the market uncertainty regarding accounting information is similar for rms capitalizing high R&D portions and those expensing all R&D expenditure. By contrast, rms capitalizing low R&D portions prompt less market uncertainty for accounting information than firms expensing all R&D expenditure or rms capitalizing high R&D portions. Our results suggest that capitalizing versus expensing R&D expenditure has important valuation implications; a conclusion which, however, depends on the degree of capitalization intensity. Overall, our study enhances the understanding on how the market assigns value to R&D accounting information. Having emphasized the role of R&D capitalization intensity, our results indicate to researchers, practitioners and standard setters that R&D capitalization under IRFS is in fact informative.