Revisiting the ability of research and development activities to improve value relevance

Abstract

Purpose

This article aims to evaluate the informativeness of accruals on stock prices. Investors may misinterpret the information contained in accruals and produce accrual anomalies. Accruals accounting improves the quality of financial statements by providing useful information, although it also contains judgments and is less objective than operating cash-flows.

Design/methodology/approach

We employ data panel regression analysis to investigate the value relevance of financial information. Our study takes the object of companies listed on the Nasdaq stock exchange (NASDAQ) as the representative of the prominent stock exchange for technology-driven enterprises and entrepreneurs. Expanding the findings, we also use Shanghai Stock Exchange (SSE) data.

Findings

Our research finds that accruals are still relevant. However, firms with R&D expenditures reduce the ability of accruals to explain stock prices for non-technology firms and firms without intangible assets. After analyzing only tech firms (and firms with intangible assets), our tests show that R&D expenditures improve the relevancy of accruals. These findings apply to both Nasdaq and SSE.

Practical implications

Practitioners and the investment community get valuable insights into how the recognition and measurement of R&D expenditures affect the value relevance. Information about R&D increases relevancy only in firms with intangible assets and those that operate in the technology industry.

Originality/value

Our paper provides benefits by using R&D expenses to affect accruals' informativeness by comparing two countries with different recognition of R&D.

Citation

Sulistiawan, D. and Rudiawarni, F.A. (2024), "Revisiting the ability of research and development activities to improve value relevance", Business Process Management Journal, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/BPMJ-09-2023-0728