Capitalization of R&D costs and earnings management: Evidence from Italian listed companies |
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Authors: | Garen Markarian Lorenzo Pozza Annalisa Prencipe |
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Institution: | aDepartment of Accounting Finance and Management Control, Instituto de Empresa, Spain;bUniversità L. Bocconi, Accounting Department, Via Rontgen 1-20136 Milan, Italy |
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Abstract: | 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. |
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Keywords: | Earnings management Cost capitalization R& D accounting Earnings smoothing Debt covenants Italian companies |
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