Development costs capitalization and debt financing

Kreß, A., Eierle, B. and Tsalavoutas, I. (2019) Development costs capitalization and debt financing. Journal of Business Finance and Accounting, 46(5-6), pp. 636-685. (doi:10.1111/jbfa.12370)

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Abstract

This study investigates debt market effects of research and development (R&D) costs capitalization, using a global sample of public bonds and private syndicated loans issued by public non‐financial firms. Firstly, we show that firms capitalize larger amounts of R&D in a year when they exhibit a propensity for issuing bonds, rather than borrowing funds privately from the syndicated loan market, in the subsequent year. Secondly, we provide evidence that capitalized R&D investments reduce the cost of debt. We infer that debt market participants are able to identify firms’ motives for R&D capitalization, as we find a reduction in the cost of debt only for those firms that do not show indications of employing R&D capitalization for earnings management reasons. Indeed, only for this sub‐sample of firms, the amount of capitalized R&D contributes positively to future earnings. We confirm that R&D capitalization is positively associated with audit fees and thus can be deemed to be a signaling device. Lastly, we find that it is the amount of R&D a firm is expected to capitalize and not the discretionary counterparts, which facilitates a firm's access to public debt markets, reduces bond and syndicated loan prices, and contributes to future benefits.

Item Type:Articles
Additional Information:Brigitte Eierle gratefully acknowledges the financial support of Fraunhofer SCS.
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Tsalavoutas, Dr Ioannis and Kress, Mr Andreas
Authors: Kreß, A., Eierle, B., and Tsalavoutas, I.
College/School:College of Social Sciences > Adam Smith Business School > Accounting and Finance
Journal Name:Journal of Business Finance and Accounting
Publisher:Wiley
ISSN:0306-686X
ISSN (Online):1468-5957
Published Online:16 January 2019
Copyright Holders:Copyright © 2019 John Wiley and Sons Ltd
First Published:First published in Journal of Business Finance and Accounting 46(5-6):636-685
Publisher Policy:Reproduced in accordance with the publisher copyright policy

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