A Study On The Information Content Of R&D Capitalization

R&D is very helpful for enhancing technological content of products and increasing core competitiveness of the companies.R&D requires companies to invest large amount of money,however,many companies do not conduct R&D because R&D expenditures are credited to expense.Accounting Standards for Business Enterprises(ASBE,2006) about R&D capitalization reduces the concerns of companies to some extent.The rule encourages enterprises to invest in R&D so as to improve the operating conditions.ASBE(2006) about capitalization of R&D originated from International Financial Reporting Standards.This paper compares R&D accounting treatments of some countries and analyses the need for international convergence. Capitalization of R&D has offered new information to investors.Has the information been noticed by the stock market? Is there any market reaction? Is there any accounting information content? All above are the focuses in this paper.This study empirically examines the issues mentioned above using data of financial statements of 2007 prepared by listed A share companies in Shanghai and Shenzhen stock exchanges as samples.According to the results,recognition of R&D has significant industry characteristics.Although the stock markets have given positive price-reaction,enterprises that recognized R&D didn't show higher value relevance of accounting information comparing to those who didn't recognize it.This shows that the stock markets have not been able to distinguish between them.This paper reveals the reasons as follows:immature stock market, irrational investors,neglect of R&D,too briefly disclosure in the notes,subjectivity of recognition,and unpredictability.The author believes that R&D is a power for companies.Companies should pay great attention and concentration to R&D. Because R&D has time lag and cumulative effect,companies that made investment in R&D would have more potential to succeed.