Are In-Process Research and Development Charges Too Aggressive? Evidence from Acquired Firms' R&D Expenses and Acquirers' Iprd Charges

30 Pages Posted: 21 Oct 2005

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

Date Written: September 21, 2005

Abstract

In-process research and development is the value allocated to incomplete research and development projects in acquisitions treated as purchases, and charged to expense by the acquirer at the acquisition date. Researchers have documented the benefits to acquiring companies from large IPRD charges, and in 1998, the SEC expressed concern that companies inflate future earnings by overstating their IPRD charges. In this paper, we investigate the IPRD charges for 144 acquisitions of target companies with publicly available information about their previous R&D costs. We find a positive relation between IPRD charges and the prior R&D costs of the acquired firm, consistent with appropriate IPRD reporting, on average. However, we identify 23 acquisitions with high IPRD but low prior R&D costs, suggesting overly aggressive write-offs, and justifying SEC concerns. These acquirers faced higher investor expectations for future earnings and had higher pre-write-off earnings compared to acquirers reporting normal IPRD. Consistent with SEC scrutiny of IPRD leading to more appropriate reporting, the number of acquisitions with excessive IPRD decreased significantly after 1998. Finally, we observe that investors adjusted the relation of earnings and returns to account for the increase in future earnings arising from write-offs of IPRD.

JEL Classification: M41, M43, G38, K22, G24

Suggested Citation

Dowdell, Thomas D. and Lim, Steve and Press, Eric G., Are In-Process Research and Development Charges Too Aggressive? Evidence from Acquired Firms' R&D Expenses and Acquirers' Iprd Charges (September 21, 2005). Available at SSRN: https://ssrn.com/abstract=822984 or http://dx.doi.org/10.2139/ssrn.822984

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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