The relation between R&D intensity and future market returns: does expensing versus capitalization matter?

The Australian accounting environment provides an ideal setting for examining the impact of different accounting treatments of firms' R&D activities on their subsequent returns. Unlike US firms, which can only expense R&D, Australian GAAP permits firms to either expense or capitalize th...

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Bibliographic Details
Published in:Review of quantitative finance and accounting 2007-07, Vol.29 (1), p.25-51
Main Authors: Chan, Howard W. H., Faff, Robert W., Gharghori, Philip, Ho, Yew Kee
Format: Article
Language:English
Subjects:
Accounting
Accounting procedures
Accounting research
Accounting standards
Australia
Business accounting
Expenditures
Financial accounting
Financial reporting
GAAP
Generalized method of moments
R&D
Research & development
Research and development
Studies
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Summary:The Australian accounting environment provides an ideal setting for examining the impact of different accounting treatments of firms' R&D activities on their subsequent returns. Unlike US firms, which can only expense R&D, Australian GAAP permits firms to either expense or capitalize their R&D expenditure. We examine separately the market impact of the R&D intensity of all R&D active firms, "capitalizers" and "expensers". Our results suggest that firms with higher R&D intensity perform better, regardless of the accounting method used, consistent with the resource-based view of the firm. We also find some evidence that firms which expense R&D outperform those which capitalize R&D after controlling for R&D intensity. [PUBLICATION ABSTRACT]
ISSN:0924-865X
1573-7179
DOI:10.1007/s11156-007-0023-1