ESSEC Working Papers
No DR 03021:
Value Relevance of R&D Reporting : A Signaling Interpretation
Anne Cazavan-Jeny ()
and Thomas Jeanjean ()
Abstract: Accounting for research and development (R&D) costs is an
open issue. SFAS N°2 mandates that all R&D costs are immediately expensed.
International standards prescribe a capitalization of R&D costs if they
meet certain criteria (IAS 38). Recent research papers (Healy et al., 2002;
Lev and Sougiannis, 1996, 1999; Aboody and Lev, 1998, Zhao, 2002) show that
capitalization of R&D costs and software development costs is value
relevant. However critics can be leveled at previous research because prior
empirical tests are based on simulated or partial data. Our purpose is to
test empically R&D accounting issues on a sample of 95 French firms on a
three years period (1998-2000). French context provides an experimental
field for studying the value relevance of R&D capitalization, because both
accounting treatments of R&D costs (expensing and capitalization) are
allowed. We find that capitalized R&D is positively associated with stock
returns and stock prices, whereas expensed R&D is negatively related to
stock prices and stock returns. R&D accounting reduces the information
asymmetry on the successfulness of R&D projects: it acts as a signal to
investors.
This paper extends previous literature by using real data on
capitalized R&D, instead of estimated data. Moreover, we show not only that
capitalized R&D is value relevant but also that expensing of R&D projects
conveys a negative signal.
Keywords: Value relevance; R&D; France; Financial reporting; Capital markets; Accounting choice; (follow links to similar papers)
JEL-Codes: M41; O32; (follow links to similar papers)
49 pages, July 2003
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