Research On The Importance Of R&D Disclosure

Transfer of economic growth mode has been an important topic for China's economic development since 1990s. It needs the effort of the whole society, especially the input of the enterprises– the basic unit of economic development, which requires the enterprises to pay more attention to innovation, increase the input to research and develop more new technologies, new products or improve existing products and manufacturing technology. The enterprises are independently operating entities, facing the market on their own, and the judgments from the market, to some extent, decide the management of the enterprises. In China, the existing Accounting Standards did not make any requirement on the disclosure of R&D expenses, which does no good for the market to evaluate the enterprises properly: the market cannot recognize the real expenses on R&D, and may under-evaluate the enterprises, which will lead to deduction of their enthusiasm on R&D, and even influence the transfer of China's economic growth mode. Based on the reasons above, the author makes R&D disclosure as the topic of this paper.This paper is based on empirical study, together with necessary explanation and instruction. The purpose is to show the importance of R&D disclosure.There are 5 chapters (13 sections) in total, making the research on the importance of R&D disclosure from theoretical aspect as well as empirical aspect. The preface is the beginning of the paper, illustrating the significance, the frame and innovation of this topic.Chapter 1, theoretical research on the importance of R&D disclosure, is the theoretical foundation of the analysis. This chapter compares the advantages and disadvantages of three R&D accounting methods: total capitalization, partial capitalization, and total expenses. The three accounting methods are reasonable; however, there are limitations of them. The conclusion of this chapter is that disclosure, as the supplement, may make up the limitations of the three methods, theoretically analyzing the importance of R&D disclosure. Chapter 2, literature review, collects research results on R&D in and outside China. 1 relativity research of stock value and accounting return; 2 relativity research of R&D information and enterprise value; 3 R&D accounting method research, which is a relatively deep and extensive field of domestic and overseas research; 4 relation between R&D expenses and production increase, which can be the expansion of R&D research.Chapter 3, model selection, begins with the brief introduction of the interpretation, deduction, and the definition of variables of Feltham-Ohlson model, paving the way for the modification and application of further model. Considering the application, the author makes some modifications on Feltham-Ohlson pricing model, adding the variables of R&D and non-circulated stock.Chapter 4, as the key chapter of this paper, based on the theoretical analysis of chapter 2, selects 100 listed companies in Shenzhen and Shanghai stock markets (2002-2006) as sample, and makes empirical study with modified Feltham-Ohlson pricing model.Via descriptive statistics analysis, it comes out with following results: (1) the number of companies which dispose R&D expenses is increasing yearly, and the listed companies of China has gradually realized the importance of R&D disclosure for investors and market to evaluate the enterprises properly; (2) the total sum of disposed R&D expenses is increasing year by year. To some extent, it can be seen that the input of R&D of China's listed companies is increasing. Because of the pressure of technology development and market competition, the enterprises have no choice but to increase R&D input to develop new products and new technology, or improve existing products and manufacturing process so as to survive and develop. (3) the average of ROE of the companies with R&D disclosure is higher than that of those without. However, because there is no evidence to prove that the companies without R&D disclosure had no R&D expenses in 2005, the result may be caused by other reasons, and cannot prove that the R&D expenses could improve the profit ability. (4) both the average and median of M/B of the companies with R&D disclosure are higher than that of those without. The market holds positive attitude towards the companies with R&D disclosure, and gives higher evaluation. The companies without R&D disclosure did not absolutely have no R&D input, however, without disclosure, the market would suppose they have no R&D, and give lower M/B, under-evaluating the enterprises. This result somehow testifies the author's prediction, and also proves the importance of R&D disclosure.(5) most companies with R&D disclosure are manufacture industries, which is the most competitive industries.This paper divides the sample into two groups according to the sign of net profits, and makes regression analysis respectively, coming out with the following results: (1) when companies are with profits, there is a significant positive relation between R&D expenses and market value of companies, which shows that R&D expenses play an positive role in evaluating profit companies properly. When companies are with deficits, there is positive relation between R&D expenses and market value of companies, which shows that R&D expenses have influence to companies with deficits. This result testifies the author's prediction. (2) there is a significant positive relation between net profit and market value, which shows the value correlativity of the accounting information. Net profit plays an important role in the process of company evaluation, with strong interpretability. It is consistent with the results of Feltham & Ohlson. (3) when the net profit is negative, there is a significant negative relation between net profit and market value. The market shows negative attitude towards negative net profit, which shows that the market is deficit aversion. It somehow explains that if without disclosure of R&D expenses, the company will be under-evaluated.(4) when the net profit is positive, there is significant positive relation between BVE and market value; when the net profit is negative, there is significant negative relation between BVE and market value. (5) there is significant positive relation between NTS and market value. (6)there is no significant relation between DIV and market value.The innovations are: 1 during the process of research, the author collects plenty of R&D disclosure data, which provides strong support for further related research. 2 fill the blank in the field of R&D disclosure in and outside China. In foreign countries, there are requirements on R&D disclosure, but seldom research on R&D disclosure but on appraising the accounting methods. In China, the accounting standards make no requirements on R&D disclosure, and researches focus on accounting methods. This paper is doing research on the field of disclosure, trying to make use of disclosure to make up the defects of all kind of accounting methods, and provide policy suggestions on accounting standards of China. 3 introduce R&D as the source of abnormal profit into Feltham-Ohlson pricing model to clarify the relationship between R&D and market value.There are still some areas need improving: 1 when collecting data, because the annual reports (2006) of most listed companies were not issued yet, the research is lack of data of year 2006, which should be added in to enlarge the sample. 2 although R&D may bring abnormal profits, just substituting R&D for abnormal profits is not consistent with the fact. More variables can be taken into consideration. 3 the modification of non-circulated stocks is too rough. Non-circulated stock price may be exchanged by circulated stock price based on certain proportion. 4 when calculating MVE, the stock price was the closing price at the end of April after the accounting year, which contains a hypothesis that there is no other information influencing stock price. This hypothesis is not universal. The best way for improvement is to adopt the closing price at the second of annual reports are issued, since this price may best reflect the influence of annual report to the market, making MVE more real. 5 the application of model did not take company size into consideration, and control variables including assets could added into the model.