Capitalised development costs and future cash flows: The effect of CEO overconfidence and board gender diversity

Khadija S. Almaghrabi1, Richard Slack, Ioannis Tsalavoutas, Fanis Tsoligkas

Research output: Working paper / PreprintWorking paper

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Abstract

Capitalisation of development costs mandated under IAS 38 is an important accounting issue conveying a signalling effect to users of accounting information regarding future economic benefits. Using a longitudinal sample of UK firms, firstly, we examine the adverse effect of CEO overconfidence on the association between capitalised development costs and future economic benefits (proxied by cash flows). Secondly, we examine the moderating influence of board gender diversity on this association. We find that the association between capitalised development costs and future cash flows, while positive, is significantly weaker for firms with higher levels of CEO overconfidence, implying that the signalling effect of capitalisation is diluted. Moreover, our results show that board gender diversity significantly moderates the managerial bias associated with overconfidence helping to restore the neutrality of accounting and the strength of signalling with regards to future benefits.
Original languageEnglish
Place of PublicationGlasgow, U. K.
PublisherUniversity of Glasgow
Publication statusPublished - 4 Apr 2024

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