The Role of R&D Capitalisations in Firm Valuation and Performance Measurement
Posted: 5 Nov 2011
Date Written: Nov 30, 1998
We investigate the value-relevance of capitalised R&D on the balance sheet, and the extent to which R&D accruals improve the association between accounting-based measures of firm performance and capital market returns for Australian listed companies. This is a regulatory setting where management discretion in the capitalisation decision is permitted and can be empirically observed. Our results suggest that capitalised R&D on the balance sheets of selective capitalisers is value-relevant; that is, the ability of capitalised R&D to explain information contained in prices (given information conveyed by other components of the balance sheet) is statistically significant. For the same group of firms R&D accruals (particularly the initial capitalisation) improve accounting earnings as a measure of performance but only for the pooled sample using contemporaneous returns. The results for the fully expensing sample are less clear, perhaps due to the small sample size.
JEL Classification: M40, M41, M49
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