Were In-Process Research and Development Charges Too Aggressive?

21 Pages Posted: 13 Oct 2009

See all articles by Thomas D. Dowdell

Thomas D. Dowdell

North Dakota State University

Steve C. Lim

Texas Christian University - M.J. Neeley School of Business

Eric Press

Temple University - Department of Accounting

Abstract

Prior research documents that US firms write off large in-process research and development charges (IPRD) for acquisitions, possibly overstating the current period expense to inflate future earnings. Consequently, in 1998, the US Securities and Exchange Commission (SEC) began scrutinizing IPRD charges. We use pre-acquisition R&D expenses of 144 target firms as a benchmark for assessing whether IPRD charges are appropriate. Overall, the results suggest that most firms during our sample period were not overly aggressive in expensing IPRD–especially for acquisitions subsequent to the SEC's scrutiny. The results also indicate that the SEC's intervention reduced the frequency of overstated IPRD charges.

JEL Classification: M44, C93

Suggested Citation

Dowdell, Thomas D. and Lim, Steve and Press, Eric G., Were In-Process Research and Development Charges Too Aggressive?. Journal of Business Finance & Accounting, Vol. 36, Nos. 5-6, pp. 531-551, June/July 2009, Available at SSRN: https://ssrn.com/abstract=1486383 or http://dx.doi.org/10.1111/j.1468-5957.2009.02155.x

Thomas D. Dowdell (Contact Author)

North Dakota State University ( email )

Department of Accounting & Information Systems
Minard Hall
Fargo, ND 58105
United States

Steve Lim

Texas Christian University - M.J. Neeley School of Business ( email )

2900 Lubbock Street
Fort Worth, TX 76129
United States
817-257-7536 (Phone)

Eric G. Press

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215-204-8127 (Phone)
215-204-5587 (Fax)

HOME PAGE: http://oll.temple.edu/epress/

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