The purpose of this paper is to investigate how different research and development (R&D) accounting choice (capitalization and expensing) affects the value of the listed companies under the new Chinese Accounting Standards (CAS) background. According to new CAS, R&D expenditure can either be expensed as incurred as a whole or partly capitalized and partly expensed from 2007.
The paper takes the form of an empirical study using a hand-collected sample of 3,664 observations from Chinese listed companies over 2007–2012 timeframe.
It is found that different methods of reporting R&D investments do affect the value of listed firms in China. Specifically, the firms that chose to capitalize their R&D investments have higher stock price and return. On the contrary, the companies that select to expense their R&D expenditures have lower stock price and return. It is also found that capitalized R&D investments are positively connected to stock price, while expensed R&D expenditures are negatively related to stock prices.
This paper researches and finds the value relevance of R&D capitalization and expensing from the accounting report method itself. This explores some interesting research questions. Does choice of accounting method for R&D expenditure affect firm valuation? Do different methods of reporting R&D investments transfer different signal to investors? Does expensed R&D carry a negative signal to investors? So it can expand the existing R&D area of research.
This paper can provide empirical evidence and decision support for corporate managers, R&D policy makers and investors in a non-mandatory disclosure market of R&D expenditure. Because different R&D accounting choice has different market reactions, managers can choose a favorable method of reporting R&D investments to raise their firm’s stock price. Policy makers should standardize accounting treatment of R&D expenditure, strengthen the disclosure of R&D information and develop a detailed, workable R&D capitalization accounting policies and procedures. Investors can make the right judgment and decision on business innovation capability and future development only by getting more R&D investment information.
Different from present studies focusing on the value relevance of R&D investment, this paper explores an interesting topic showing how different methods of reporting R&D investment in China affect the value of the firms.
This research is supported by the National Natural Science Foundation of China (71203174), Natural Science Basic Research Program of Shaanxi Province of China (2014JQ9374) and the Fundamental Research Funds for the Central Universities (JB140602).
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