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)

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, Professor Yannis 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