The impact of accounting for internally generated intangibles on information asymmetry

I investigate the impact of accounting for internally generated intangibles on information asymmetry, measured as bid-ask spread, analyst coverage, and properties of financial analysts' earnings forecasts. Current GAAP generally requires the immediate expensing of investments in internally generated intangibles, with the exception of software development costs per Statement of Financial Accounting Standards 86 (SFAS 86). Because of this exception, comparisons between firms in software industries and other high-tech industries provide a natural setting for testing the impact of accounting for internally generated intangibles on information asymmetry. I also compare capitalizers and expensers within software industries. My results of both comparisons suggest that SFAS 86 has a favorite impact on information asymmetry.; Using three measures of information asymmetry, I find weak evidence of reduction in information asymmetry for software firms relative to other high-tech firms after implementing SFAS 86. I obtain this result for only one of the measures of information asymmetry, namely bid-ask spread. There are no significant differences in the changes in the other two measures of information asymmetry, namely analyst coverage the public information component in analysts' forecasts, between the two groups. Comparisons between capitalizers and expensers of software development costs within software industries provide stronger results in favor of lower information asymmetry for capitalizers relative to expensers after implementing SFAS 86. I find, after implementing SFAS 86, that: (1) bid-ask spread has decreased for capitalizers relative to expensers, (2) analyst coverage has decreased for capitalizers relative to expensers, and (3) the public information component in analysts' earnings forecasts increased for capitalizers relative to that of expensers.; My results are consistent with the notion that higher quality information has a positive impact on information asymmetry, and suggest that the trade-off between relevance and reliability does not justify the immediate expensing of internally generated intangibles. My findings suggest that firms do not exploit the flexibility to capitalize to manage their earnings and reduce the amount of useful information.