Research On The Value Relevance Of R&D Capitalization And Expensing And Its Influencing Factors

Accounting for R&D expenditures is an open issue. New Chinese Accounting Standards NO.6, which was published in2006, made significant change about the accounting treatment of R&D expenditures. The conditional capitalization method replaced the expensing method, and this change is convergence with IAS and also provides a potentially more powerful setting for studying the R&D dilemma.This paper tests the value relevance of the reporting method used for R&D costs and investigates what factors influence the choice of accounting for R&D expenditures (capitalization or expensing) using a sample of1071observations from Chinese listed companies that disclosed information on R&D over the period2007-2010. In this paper, we build stock price models, stock returns models and accounting choice models to make the regressions analyses, the empirical findings show that:(1) Capitalized R&D is negatively associated with stock prices and is positively associated with stock returns. This indicates that capitalization of R&D is value relevance and has an incremental explanatory power.(2) There is a negative association between expensed R&D costs and stock market values (stock prices and returns), which implies that expensing signals negative information to market participants. Besides, the effect of expensed R&D expenditures on stock prices is less than capitalized R&D costs.(3) The value relevance of capitalized R&D is higher than expensed R&D. Investors distinguish between capitalized and expensed R&D, and they react negatively to expensed R&D.(4) Accounting choice for R&D expenditures is affected by the characteristics of the companies. Capitalization is preferred by those companies which are greater R&D intensity, less profitable, smaller size, more highly leverage, lower ownership concentration, non-steady-state of R&D investment, high-tech industry and in the condition of losses. While the firms choosing to expense R&D are larger, higher profitable, lower leveraged, more concentrate ownership and in steady-state for R&D. This suggests an opportunistic use of R&D capitalization by Chinese managers. Moreover, weaker evidence shows any relation between systematic risk, growth, smoothing profits and accounting choice for R&D.Finally, based on theoretical analyses and the results of empirical study, this paper presents some relative suggestions as follows:(1) Set strict criteria for the classification of the research and development phase.(2) Improve the operability of the qualified capitalization of R&D expenditures.(3) Strengthen the disclosure of companies’ R&D investment.(4) To promote the companies independent R&D, providing a more favorable institutional environment. Then the paper also pointed out its limitations and the future research.