Capitalization of R&D costs and earnings management: Evidence from Italian listed companies

The capitalization of research and development (R&D) costs is a controversial accounting issue because of the contention that such capitalization is motivated by incentives to manipulate earnings. Based on a sample of Italian listed companies, this study examines whether companies' decisions to capitalize R&D costs are affected by earnings-management motivations. Italy provides a natural context for testing our hypothesized relationships because Italian GAAP allows for the capitalization of R&D costs. Using a Tobit regression model to test our hypotheses, we show that companies tend to use cost capitalization for earnings-smoothing purposes. The hypothesis that firms capitalize R&D costs to reduce the risk of violating debt covenants is not supported.     

The relationship between managerial ownership and firm performance in high R&D firms

Several studies have examined the relationship between managerial ownership and firm performance/value (e.g., [Journal of Financial Economics 20 (1988) 293; Journal of Financial Economics 27 (1990) 595; Journal of Corporate Finance 5 (1999) 79]). Using different samples, these studies provide general support for the argument that increases in managerial ownership create countervailing interest alignment and entrenchment effects, leading to a nonlinear relationship between managerial ownership and firm performance. However, the actual form of this nonlinear relationship differs across the studies.The present paper examines the relationship between managerial ownership and performance for high R&D firms that are listed on the NYSE, AMEX and NASDAQ. We find that Tobin's Q initially declines with managerial ownership, then increases, then declines again and, finally, increases again—a W-shaped relationship. The findings from our study point to the importance of industry effects in the relationship between managerial ownership and firm performance.     

Stock price and systematic risk effects of discontinuation of corporate R&D programs

We extend the evidence on whether investors impound efficiently into stock prices new disclosures about corporate R&D programs. We find that firms that disclose the discontinuation of some of their R&D programs experience a significant negative announcement-period stock price response which is worse for growth stocks, for small-size firms, and for firms with low operating cash flow. We find no evidence that R&D discontinuing firms experience an event-induced change in their systematic risk. We find evidence of a one-year-long price reversal; however, it is not robust to controlling for possible risk dimensions for firms with R&D capital that the three-factor model does not capture. Evidently, investors' initial response at disclosures of discontinuation of corporate R&D programs is efficient.     

The value-relevance of R&D and advertising expenditures: Evidence from Korea

This study examines the value-relevance of R&D and advertising expenditures of Korean firms, using a regression model based on the Ohlson [Contemp. Account. Res. (1995) 661] equity-valuation framework. Results indicate that R&D expenditures are positively associated with stock price, suggesting that capitalizing R&D expenditures is appropriate. The association is stronger for the portion of R&D expenditures that is capitalized, rather than expensed, suggesting that investors agree with management that the capitalized expenditures represent greater future economic benefits. Investors also appear to interpret fully expensed R&D expenditures as positive net present-value investments, however, suggesting that these expenditure should also be capitalized. Additional results indicate that advertising expenditures are negatively associated with stock price, and the magnitude of this negative association is similar to the association between other expenses and stock price. These findings suggest that investors believe the economic benefits of advertising expenditures expire in the current period, similar to other expenses.     

Corporate investment myopia: a horserace of the theories

This paper tests two theories of corporate investment myopia which predict a distortion in investment policy with respect to the standard net present value rule. The theories are confronted with the empirical evidence, allowing the theories to compete to explain investment behavior. Research and development expense is used to proxy for long-term investment in a pooled, cross-sectional time-series regression. I find that research and development expense is decreasing in the age of the Chief Executive Officer. Results are consistent with the hypothesis that agency costs are lower when the firm invests myopically, rather than follow a standard net present value rule.     

Financial market development and the effectiveness of R&D investment: Evidence from developed and emerging countries

Does financial market development enhance the effectiveness of R&D investment in an economy? To address this question, we apply three distinct approaches including (i) ordinary least square method, (ii) cross-country instrumental variable regression approach, and (iii) panel regression method. By using a dataset of both developed and emerging countries, we find that financial market development significantly contributes to the effectiveness of total R&D investment. This finding remains robust across different model specifications and individual estimation methods. Our finding provides an important guidance to policy makers in implementing a sound financial environment that can facilitate the total contribution of R&D investment.     

Reliance on R&D Partnerships: The Influence of Short-Term R&D Bias and The Nature of Competition

Reports indicate that capital markets frequently focus on short-term corporate financial performance. Arguments suggest that the R&D projects of many firms are skewed towards short-term, low-risk projects with relatively modest expected benefits, reflecting both a response by companies to financial market pressure to maintain short-term returns and a short-term R&D bias. Anecdotal evidence suggests that one response to short-term R&D bias by firms is for them to seek R&D partnerships with customers and suppliers. A theory is developed which suggests that when firms compete on the basis of product costs, they are likely to seek partnerships with customers and suppliers in order to respond to short-term R&D pressures. In contrast, when competition is innovation-based, firms are unlikely to pursue R&D partnerships in response to short-term R&D bias. The results of an empirical study provide support for this proposition.     

跨国公司技术联盟:动因、效应及启示

跨国公司技术联盟是在经济全球化与一体化的国际背景下发展起来的，它被愈来愈多的人认为是一种知识联盟，是一种独立的组织形式。跨国公司进行技术联盟的动因在于：获取与企业核心技术相关的上下游技术、适应网络竞争的需要及促进研究与开发等。跨国公司技术联盟既给合作方带来一定的积极效应，同时也产生相当的负面影响。在当前，跨国公司技术联盟对我国企业进行技术联盟与合作有积极的借鉴意义。     

The Determinants and Value Relevance of the Choice of Accounting for Research and Development Expenditures in the United Kingdom

Abstract:  This paper investigates the determinants and value relevance implications of the accounting method choice for development expenditures for firms with research and development (R&D) programs in the United Kingdom (UK). Using a sample of 3,229 UK firm-year observations over the period 1996–2004, I find that the decision to expense versus capitalize development expenditures is influenced by earnings variability, earnings sign, firm size, R&D intensity, leverage, steady-state status of the firm's R&D program, and R&D program success. Additional results indicate that there is little difference in value relevance between reported and adjusted numbers for both the Expensers and the Capitalizers. The evidence in this paper suggests that managers choose the 'correct' method for accounting for R&D in order to best communicate the private information which they hold.     

Penetrating the Book-to-Market Black Box: The R&D Effect

The book-to-market (BM) phenomenon – the positive association between BM and subsequent returns – looms large among capital market enigmas. Economic theory postulates that the difference between market and book values of companies reflects their future abnormal profits. We capture these abnormal profits for a large sample of science-based companies by estimating the value of the off-balance sheet investment generating those profits – the value of R&D capital – and show empirically: (i) Firms' R&D capital is associated with their subsequent stock returns. (ii) For R&D intensive firms, this 'R&D effect' subsumes the 'book-to-market effect.' (iii) The association between R&D and subsequent returns appears to result from an extra-market risk factor inherent in R&D, rather than from stock mispricing. We thus provide an explanation for the book-to-market phenomenon of R&D companies.     

Firm boundaries matter: Evidence from conglomerates and R&D activity

This paper examines the impact of the conglomerate form on the scale and novelty of corporate Research and Development (R&D) activity. I exploit a quasi-experiment involving failed mergers to generate exogenous variation in acquisition outcomes of target firms. A difference-in-differences estimation reveals that, relative to failed targets, firms acquired in diversifying mergers produce both a smaller number of innovations and also less-novel innovations, where innovations are measured using patent-based metrics. The treatment effect is amplified if the acquiring conglomerate operates a more active internal capital market and is largely driven by inventors becoming less productive after the merger rather than inventor exits. Concurrently, acquirers move R&D activity outside the boundary of the firm via the use of strategic alliances and joint ventures. There is complementary evidence that conglomerates with more novel R&D tend to operate with decentralized R&D budgets. These findings suggest that conglomerate organizational form affects the allocation and productivity of resources.     

Power‐Sharing in Monetary Policy Committees: Evidence from the United Kingdom and Sweden

Committees may make better monetary policy decisions than individuals; however, the benefits of group decision making could be lost if committee members cede power to a chairman. We develop an econometric model to describe intracommittee power‐sharing across members. Estimation of the model permits us to classify monetary policy committees into the typology developed by Blinder ( 2004 , 2007 ). We estimate our model for the United Kingdom's Bank of England (BOE) and Sweden's Riksbank. Results for the BOE suggest that the Governor has little influence over other committee members, while those for the Riksbank indicate that the Governor is highly influential.     

The Relation Among Targets' R&D Activities, Acquirers' Returns, and In-Process R&D in the US

Abstract:  Using a sample of 129 mergers and acquisitions (M&As) in the US between publicly traded acquirers and targets in research and development (R&D) intensive industries over the period of 1994-2004 and a size- and industry-matched sample, we examine the relation among targets' R&D activities, the probability of acquirers' writing-off in-process R&D (IPRD), and acquirers' returns around the time of M&A announcements. We find that firms acquiring targets with higher R&D investments tend to write off some of the acquired R&D assets upon the completion of the M&As. We also find that the median cumulative abnormal return during the three days around M&A announcements for acquirers with subsequent IPRD write-offs is −2.73% while the return for acquirers without IPRD write-offs is −0.60%. This suggests that acquirers' stock returns around M&A announcements are much lower when investors expect acquirers to expense IPRD. The results are consistent with our conjecture that acquirers tend to write-off IPRD when they acquire overvalued targets. We also find that IPRD write-offs do not increase earnings or stock returns of acquirers after M&As, which is inconsistent with an earnings management hypothesis.     

The Theory-Practice Gap in Capital Budgeting: Evidence from the United Kingdom

We report the results of a survey of capital budgeting techniques used by United Kingdom firms. Where possible, the evidence is combined with data collected over a 22 year period to provide a basis for the discussion of causes of trends. We observe that there has been a substantial narrowing of the theory-practice gap in the use of project appraisal methods. The gap has also narrowed in other areas: the analysis of risk, inflation adjustment, capital budget preparation, WACC calculation and post-auditing. However, there are other elements of capital budgeting theory, e.g. probability and beta analysis which have been adopted by very few practising managers. We also discuss non-economic projects, capital rationing and hurdle rates.     

Controlling-minority shareholder incentive conflicts and directors’ and officers’ liability insurance: Evidence from China

This paper examines the demand for directors’ and officers’ liability insurance (D&O insurance) by Chinese listed companies where controlling-minority shareholder incentive conflicts are acute due to the concentrated and split ownership structure. We hypothesize and find evidence that the incidence of seeking D&O insurance is positively related to the extent of controlling-minority shareholder incentive conflicts – a finding not previously documented in the literature. Using an event study, we find that the announcements of D&O insurance decisions in firms that engage in earnings management, and/or are controlled by a local government (such firms tend to have stronger incentives to tunnel), seem to have a negative wealth effect. In addition, the incidence of the D&O insurance decision is positively related to the proportion of independent directors and several litigation risk proxies. Therefore, the breakthrough in corporate governance and judicial reforms has created non-negligible perceived securities litigation risks in China.     

Stock Market Valuation, Profitability and R&D Spending of the Firm: The Effect of Technology Mergers and Acquisitions

Abstract:  In this paper, we investigate whether a firm can enhance the effect of its R&D spending on its current market value and future profitability through technology-oriented M&As. On the basis of an analysis of 1,879 M&As, we find that when a technology firm acquires another technology firm, the magnitude of the stock price response to the R&D spending of an acquirer increases by 107% in the year of the M&A. In contrast, we find no such increase in the stock price response to the R&D spending of a non-technology acquirer. We also find that technology acquirers are more successful in converting their R&D spending into positive future profitability than non-technology acquirers. Our results are robust for different alternative specifications of our model and when various firm differences are controlled for.     

并购对企业R&D投资的挤出效应研究——基于并购前后资产负债率变动的视角

创新是企业内涵式的增长方式,并购是企业外延式的增长方式。在资源有限的情况下,企业如何在这两种战略之间进行权衡?本文以2007-2018年沪深A股上市公司为研究样本,发现如果并购引起企业资产负债率增加,则会对并购后的R&D投资形成"财务侵占",从而对研发产生负面影响;这种抑制作用在主并企业存在融资约束的情况下会更加显著;按企业特征划分,这种抑制作用主要存在于小企业和民营企业。研究结果为基于边界条件的并购如何影响企业创新绩效提供了实证证据,同时也为企业进行相关战略变更和投资决策提供了有益参考。     

R&D, knowledge spillovers and stock volatility

Firms improve their know‐how not only by innovations (producing new knowledge), but also by knowledge spillovers (learning from others). The objective of this study is to test for two major hypotheses developed from a theoretical model explaining the relationship between R&D, knowledge spillovers and stock volatility. Analytically, the model suggests that asymmetric information caused by R&D activities with uncertain future output increases stock volatility, even though dividends and consumptions remain unchanged. However, interfirm knowledge spillovers have a negative impact on stock volatility by reducing the degree of asymmetric information. Both hypotheses are supported by empirical evidence from this study.     

Intangible assets and value relevance: Evidence from the Portuguese stock exchange

We assess the value relevance of the amounts for identifiable intangible assets and goodwill reported in the financial statements of all non-finance companies listed on the main market of the Portuguese Stock Exchange from 1998 to 2008. Additionally, we use panel data to explore the impact on value relevance of Portugal’s formal adoption of International Accounting Standards [IAS] and International Financial Reporting Standards [IFRS] in 2005. A distinctive feature of the accounting by our sample companies is that when they adopted IAS 38 and IFRS 3 in 2005, they were no longer required to recognise some intangible assets (such as start-up costs and research expenditures) and were no longer required to amortise goodwill.We find that net earnings, reported goodwill and other intangible assets are highly significantly associated with stock price. However, whereas earnings are related positively to stock prices when Portuguese Generally Accepted Accounting Principles (GAAP) were applied prior to 2005, the value relevance of earnings appears to have declined after the adoption of IAS/IFRS in 2005. Although the change to IAS/IFRS had no impact on the value relevance of identifiable intangibles as a whole, the evidence suggests that there was a positive effect on the value relevance of goodwill. When the subclasses of identifiable intangible assets are considered, we found evidence of an increase in value relevance of goodwill, other intangible assets, and research and development expenditures.     

A re-examination of the index effect: Gambling on additions to and deletions from the S&P 500's ‘gold seal’

This study examines the abnormal returns, trading activity, volatility and long-term performance of stocks that were added to the S&P 500 index. By using a three-factor pricing model that allows for firm size and value characteristics as well as market risk, we are able to shed new light on the widely observed ‘index effect’. We find that the CAPM tends to overstate the performance of large firms and to understate the performance of small firms. We also find a transitory increase in trading volume between the announcement and a few days after the effective date. In terms of the firm's operating performance, we find a significant increase in earnings per share after inclusion, which combines with the stock price rise to leave the average price-earnings ratio largely unaltered. Examining a unique sample of deletions of international companies and replacements with US companies, we find that deleted stocks experienced a considerable and permanent fall in price, inconsistent with the Investor Recognition Hypothesis. The “seal” of S&P 500 index membership has very long-term effects and inclusion appears not to be an information-free event.