Capitalisation of R&D and the informativeness of stock prices: pre and post IFRS evidence

Christina Dargenidou, Richard Jackson, I Tsalavoutas, Fanis Tsoligkas

Research output: Contribution to journalArticlepeer-review

Abstract

We examine whether requiring (IFRS) versus allowing (UK GAAP) conditional capitalisation of development expenditure affects the extent to which capitalisation conveys more information about future earnings, relative to expensing. We show that capitalisation results in current returns incorporating more future earnings information than expensing under UK GAAP but not under IFRS. i.e., the amount of information incorporated into market prices of capitalisers is the same as that from firms expensing R&D under IFRS. This result holds irrespective of a firm’s earnings management incentives or strength of corporate governance for the period under IFRS. We argue that this is because investors experience greater uncertainty regarding the realisation of future economic benefits associated with the development costs capitalised in the post-IFRS period. Consistent with this, we do find a positive association between capitalised R&D and future earnings variability in the post-IFRS period only, as well as short-term positive abnormal returns for capitalisers relative to expensers in the pre-IFRS period only. Overall, these findings suggest that when moving from a standard that offers an overt option to capitalise or expense, capitalisation comes with greater uncertainty, which is resolved only in the long term.
Original languageEnglish
JournalBritish Accounting Review
DOIs
Publication statusAcceptance date - 1 Mar 2021

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