Capitalizing research & development and ‘other information': the incremental information content of accruals versus cash flows
Journal
Journal of Management Control
ISSN
2191-4761
ISSN-Digital
2191-477X
Type
journal article
Date Issued
2011-11-19
Author(s)
Abstract
This paper studies the role of the accrual process for providing value relevant information on intangibles. Expensing research & development (R&D) expenditures is, by nature, equivalent to cash accounting. Prior studies have found that accrual information has superior explanatory power for market values compared to cash flows (Dechow in J. Account. Econ. 18(1):3-42, 1994). We demonstrate, for a sample of German firms, that this also holds true for R&D accounting. By adjusting the earnings we create two samples reflecting R&D capitalization and expensing, respectively. We demonstrate that capitalizing R&D expenditures creates an additional accrual component of earnings which increases the explanatory power of earnings compared to cash flows (expensing) while internalizing ‘other information' into the accounting system. This explains the higher value relevance of capitalized R&D compared to expensing established in prior research (Lev and Sougiannis in J. Account. Econ. 21(1):107-138, 1996).
Language
English
Keywords
Accruals
Other information
Research and development
Value
relevance
relevance
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Springer
Publisher place
Berlin
Volume
22
Number
3
Start page
241
End page
278
Pages
38
Subject(s)
Eprints ID
229977
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Name
DinhThi_Schultze_2011.pdf
Size
955.25 KB
Format
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