R&D Accounting and the Tradeoff between Relevance and Objectivity

48 Pages Posted: 18 Feb 1999

See all articles by Paul M. Healy

Paul M. Healy

Harvard Business School; National Bureau of Economic Research (NBER)

Stewart C. Myers

Massachusetts Institute of Technology (MIT); National Bureau of Economic Research (NBER)

Christopher D. Howe

Massachusetts Institute of Technology

Date Written: January 1999

Abstract

This paper develops a simulation model for a pharmaceutical firm to provide evidence on the tradeoff between objectivity and relevance for several methods of reporting R&D outlays. The findings indicate that a simple capitalization rule, analogous to the successful efforts method of capitalizing oil and gas exploration costs, provides a significantly higher relation between accounting information and economic values than immediate expensing of R&D outlays or capitalizing the full cost of outlays. More importantly, our findings show that the relevance of successful efforts data persists even when there is widespread earnings management.

JEL Classification: M41, M44

Suggested Citation

Healy, Paul M. and Myers, Stewart C. and Howe, Christopher D., R&D Accounting and the Tradeoff between Relevance and Objectivity (January 1999). Available at SSRN: https://ssrn.com/abstract=147136 or http://dx.doi.org/10.2139/ssrn.147136

Paul M. Healy (Contact Author)

Harvard Business School ( email )

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Stewart C. Myers

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
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National Bureau of Economic Research (NBER)

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Christopher D. Howe

Massachusetts Institute of Technology

Sloan School of Management
Cambridge, MA 02142
United States
617-253-6576 (Phone)

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