TY - JOUR
T1 - The capitalization, amortization, and value-relevance of R&D
AU - Lev, Baruch
AU - Sougiannis, Theodore
N1 - Funding Information:
*Corresponding author. The comments and suggestions of Bronwyn Hall, Brett Trueman, and Jerold Zimrnerman were particularly helpful. We also acknowledge the assistance of Celal Aksu, Yakov Amihud, Eli Amir, William Beaver, Robert Elliott, George Foster, Zvi Griliches, Trevor Harris, Jagan Krishnan, Joseph Lakonishok, Richard Meese, Jay Ritter, Andrew Rose, Toshi Shibano, Jacob Thomas, and Ross Watts. We thank David Aboody, Moonchul Kim, and Elisabeth Oltheten for their computational assistance. The financial support of the University of Illinois' Research Board is much appreciated.
PY - 1996/2
Y1 - 1996/2
N2 - GAAP mandates the full expensing of R&D in financial statements, presumably because of concerns with the reliability, objectivity, and value-relevance of R&D capitalization. To address these concerns, we estimate the R&D capital of a large sample of public companies and find these estimates to be statistically reliable and economically meaningful. We then adjust the reported earnings and book values of sample firms for the R&D capitalization and find that such adjustments are value-relevant to investors. Finally, we document a significant intertemporal association between firms' R&D capital and subsequent stock returns, suggesting either a systematic mispricing of the shares of R&D-intensive companies, or a compensation for an extra-market risk factor associated with R&D.
AB - GAAP mandates the full expensing of R&D in financial statements, presumably because of concerns with the reliability, objectivity, and value-relevance of R&D capitalization. To address these concerns, we estimate the R&D capital of a large sample of public companies and find these estimates to be statistically reliable and economically meaningful. We then adjust the reported earnings and book values of sample firms for the R&D capitalization and find that such adjustments are value-relevant to investors. Finally, we document a significant intertemporal association between firms' R&D capital and subsequent stock returns, suggesting either a systematic mispricing of the shares of R&D-intensive companies, or a compensation for an extra-market risk factor associated with R&D.
KW - Capitalization
KW - Intangibles
KW - Market valuation
KW - Mispricing
KW - R&D
UR - http://www.scopus.com/inward/record.url?scp=0030079993&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=0030079993&partnerID=8YFLogxK
U2 - 10.1016/0165-4101(95)00410-6
DO - 10.1016/0165-4101(95)00410-6
M3 - Article
AN - SCOPUS:0030079993
VL - 21
SP - 107
EP - 138
JO - Journal of Accounting and Economics
JF - Journal of Accounting and Economics
SN - 0165-4101
IS - 1
ER -