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Capitalisation of R&D and the informativeness of stock prices: Pre- and post-IFRS evidence
Authors:Christina Dargenidou  Richard HG Jackson  Ioannis Tsalavoutas  Fanis Tsoligkas
Institution:1. University of Exeter, Exeter Business School, Streatham Court, Room 1.12, Rennes Drive, Exeter, EX4 4PU, UK;2. University of Bath, School of Management, Wessex House, Room 9.18, Claverton Down, Bath, BA2 7AY, UK;3. University of Glasgow, Adam Smith Business School, West Quadrangle, Main Building, Room G683, University Avenue, Glasgow, G12 8QQ, Scotland, UK;4. University of Bath, School of Management, Wessex House, Room 9.52, Claverton Down, Bath, BA2 7AY, UK
Abstract:We examine whether requiring (IFRS) versus allowing (UK GAAP) conditional capitalisation of development expenditure affects the extent to which capitalisation conveys more information about future earnings, relative to expensing. We show that capitalisation results in current returns incorporating more future earnings information than expensing under UK GAAP but not under IFRS. i.e., the amount of information incorporated into market prices of capitalisers is the same as that from firms expensing R&D under IFRS. This result holds irrespective of a firm’s earnings management incentives or strength of corporate governance for the period under IFRS. We argue that this is because investors experience greater uncertainty regarding the realisation of future economic benefits associated with the development costs capitalised in the post-IFRS period. Consistent with this, we do find a positive association between capitalised R&D and future earnings variability in the post-IFRS period only, as well as short-term positive abnormal returns for capitalisers relative to expensers in the pre-IFRS period only. Overall, these findings suggest that when moving away from a standard that offers an overt option to capitalise or expense, capitalisation comes with greater uncertainty, which is resolved only in the long term.
Keywords:Research and development  IFRS adoption  IAS 38  SSAP 13  O30  M41  M48
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