Capitalisation of R&D and the informativeness of stock prices: pre- and post-IFRS evidence

Dargenidou, C., Jackson, R. H.G., Tsalavoutas, I. and Tsoligkas, F. (2021) Capitalisation of R&D and the informativeness of stock prices: pre- and post-IFRS evidence. British Accounting Review, 53(4), 100998. (doi: 10.1016/

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We examine whether requiring (IFRS) versus allowing (UK GAAP) conditional capitalisation of development expenditure affects the extent to which capitalisation conveys more information about future earnings, relative to expensing. We show that capitalisation results in current returns incorporating more future earnings information than expensing under UK GAAP but not under IFRS. i.e., the amount of information incorporated into market prices of capitalisers is the same as that from firms expensing R and D under IFRS. This result holds irrespective of a firm’s earnings management incentives or strength of corporate governance for the period under IFRS. We argue that this is because investors experience greater uncertainty regarding the realisation of future economic benefits associated with the development costs capitalised in the post-IFRS period. Consistent with this, we do find a positive association between capitalised R and D and future earnings variability in the post-IFRS period only, as well as short-term positive abnormal returns for capitalisers relative to expensers in the pre-IFRS period only. Overall, these findings suggest that when moving from a standard that offers an overt option to capitalise or expense, capitalisation comes with greater uncertainty, which is resolved only in the long term.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Tsalavoutas, Professor Yannis and Tsoligkas, Dr Fanis
Authors: Dargenidou, C., Jackson, R. H.G., Tsalavoutas, I., and Tsoligkas, F.
College/School:College of Social Sciences > Adam Smith Business School
College of Social Sciences > Adam Smith Business School > Accounting and Finance
Journal Name:British Accounting Review
ISSN (Online):1095-8347
Published Online:04 March 2021
Copyright Holders:Copyright © 2021 British Accounting Association
First Published:First published in British Accounting Review 53(4): 100998
Publisher Policy:Reproduced in accordance with the publisher copyright policy

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