The negative impact of R&D capitalization: a value relevance approach

T. JEANJEAN, A. Cazavan-Jeny

European Accounting Review

mai 2006, vol. 15, n°1, pp.37-61

Départements : Comptabilité et Contrôle de Gestion

Accounting for R&D costs is an open issue. SFAS N°2 mandates that all R&D costs must be immediately expensed. IAS 38 requires capitalization of R&D costs if they meet certain criteria. Recent research papers (Healy et al., 2002; Lev and Sougiannis, 1996; Zhao, 2002; Callimaci and Landry, 2004) show the value relevance of capitalized R&D. We test the value relevance of R&D reporting in a sample of 197 French firms between 1993 and 2002. The French context provides an interesting field for R&D value relevance studies because both accounting treatments of R&D costs (expensing and capitalization) are allowed. Unlike previous studies, we find that capitalized R&D is negatively associated with stock prices and returns. This negative coefficient on capitalized R&D implies that investors are concerned with and react negatively to capitalization of R&D. We also find that the firms choosing to capitalize (successful) R&D are smaller, more highly-leveraged, less profitable and have less growth opportunities. Taking into account these characteristics, our robustness checks confirm that capitalized R&D is not associated with higher prices and is related to lower returnsKey words: value relevance, R&D, France, financial reporting, accounting choice.