The relation between R&D accounting treatment and the risk of the firm: Evidence from the Italian market

Author/s Riccardo Cimini, Alessandro Gaetano, Alessandra Pagani
Publishing Year 2014 Issue 2014/1 Language English
Pages 22 P. 33-54 File size 286 KB
DOI 10.3280/FR2014-001002
DOI is like a bar code for intellectual property: to have more infomation click here

Below, you can see the article first page

If you want to buy this article in PDF format, you can do it, following the instructions to buy download credits

Article preview

FrancoAngeli is member of Publishers International Linking Association, Inc (PILA), a not-for-profit association which run the CrossRef service enabling links to and from online scholarly content.

In this paper, we investigate the relation between the different accounting treatments of R&D expenditures and the risk of the entity in order to identify under which treatment insiders are more likely to carry out earnings management. By analysing the R&D investment strategies of a sample of 137 listed Italian entities that complied with the requirements of IAS 38 during fiscal year 2009, following Lantz and Sahut (2005), we calculate several indexes that show the preferences of insiders to account R&D expenditures as costs or capital assets, and we study the relation of such preferences with the risk of the entity, which we measure with the unlevered beta. We hypothesize that the entities, which considered the R&D investments as costs, are the riskiest ones due to the higher probability that insiders carried out earnings management. Our results confirm such hypothesis. This paper could have implications for academics and standard setters that could learn that behind accounting discretion, insiders could opportunistically behave against outsiders.

Keywords: IAS 38; R&D accounting treatment; risk; earnings management. First submission: 30 June 2012, accepted: 31 March 2014

  1. Aboody D. and Lev B. (1998), The value relevance of intangibles: the case of software capitalization, Journal of Accounting Research, 36 (3), pp. 161-191, DOI: 10.2307/2491312
  2. Aboody D. and Lev B. (2000), Information Asymmetry, R&D and insider gains, The Journal of Finance, 55 (6), pp. 2747-2766, DOI: 10.1111/0022-1082.00305
  3. Agrawal A. and Knoeber C.R. (1996), Firm performance and mechanisms to control agency problems between managers and shareholders, Journal of financial and quantitative analysis, 31 (3), pp. 377-397, DOI: 10.2307/2331397
  4. Anagnostopoulou S.C. (2010), Does the capitalization of development costs improve Analyst forecast accuracy? Evidence from the UK, Journal of International Financial Management and Accounting, 21 (1), pp. 62-83, DOI: 10.1111/j.1467-646X.2009.01036.x
  5. Barth M.E., Landsman W.R. and Lang M.H. (2008), International Accounting Standards and Accounting Quality, Journal of Accounting Research, 46(3), pp. 467-498, DOI: 10.1111/j.1475-679X.2008.00287.x
  6. Ballester M., Garcia-Ayuso M. and Livnat J. (2003), The economic value of the R&D intangible assets, European Accounting Review, 12 (4), pp. 605-633, DOI: 10.1080/09638180310001628437
  7. Bublitz B. and Ettredge M. (1989), Advertising, research and development, Accounting Review, January, 64, pp. 108-124.
  8. Cazavan-Jeny A. and Jeanjean T. (2003), Value relevance of R&D reporting: a signalling interpretation, working paper, CEREG, 3, University Paris IX Dauphine.
  9. Cazavan-Jeny A. and Jeanjean T. (2006), The negative impact of R&D capitalization: a value relevance approach, European Accounting Review, 15 (1), pp. 37-61, DOI: 10.1080/09638180500510384
  10. Cazavan-Jeny A., Jeanjean T. and Joos P. (2011), Accounting choice and future performance: the case of R&D accounting in France, Journal of Accountig and Public Policy, 30, pp. 145-165, DOI: 10.1016/j.jaccpubpol.2010.09.016
  11. Chambers D., Jennings R. and Thompson R.B. (2003), Managerial discretion and accounting for research and development costs, Journal of Accounting Auditing and Finance, 18 (1), pp. 79-114.
  12. Chan L.K.C., Lakonishok J. and Sougiannis T. (2001), The stock market valuation of research and development expenditures, Journal of Finance, 56 (6), pp. 2431-2457, DOI: 10.1111/0022-1082.00411
  13. Chesher A. and Irish M. (1987), “Residual analysis in the grouped censored normal linear model”, Journal of Econometrics, 34 (1/2), pp. 33-61, DOI: 10.1016/0304-4076(87)90066-2.
  14. Chung K.H. (1989), Debt and risk: a technical note, Journal of Business Finance and Accounting, 16 (5), pp. 719-727, DOI: 10.1111/j.1468-5957.1989.tb00049.x
  15. Devalle A., Onali E. and Magarini R. (2010), Assessing the value relevance of accounting data after the introduction of IFRS in Europe, Journal of International Financial Management and Accounting, 21 (2), pp. 85-119.
  16. Field T.D., Lys T.Z. and Vincent L. (2001), Empirical research on accounting choice, Journal of Accounting and economics, 31, pp. 255-307, DOI: 10.1016/S0165-4101(01)00028-3
  17. Goncharov I. and Hodgson A. (2011), Measuring and Reporting Income in Europe, Journal of Accounting Research, 10 (1), pp. 27-59.
  18. Gourieoux C., Monfort A., Renault E. and Trognon, A. (1984), “Simulated residuals”, Working paper n. 8502, CEPREMAP, Paris.
  19. Healy P.M. and Wahlen J.M. (1999), A review of the earnings management literature and its implications for standard set-ting, Accounting Horizons, 13 (4), pp. 365-383, DOI: 10.2308/acch.1999.13.4.365
  20. Ho Y.K., Zhenyu X. and Yap C.M. (2004), R&D investment and systematic risk, Accounting and Finance, 44 (3), pp. 393-418, DOI: 10.1111/j.1467-629x.2004.00116.x
  21. Jensen M.C. and Meckling W.H. (1976), Theory of the firm: managerial behaviour, agency costs and ownership structure, Journal of Financial Economics, 4, pp. 305-360, DOI: 10.1016/0304-405X(76)90026-X
  22. Kothari S.P., Laguerre T.E. and Leone A.J. (2002), Capitalization versus Expensing: Evidence on the Uncertainty of Future Earnings from Capital Expenditures versus R&D Outlays, Review of Accounting Studies, 7, pp. 355-382, DOI: 10.1023/A:1020764227390
  23. Lancaster T. and Chesher A.D. (1985), Residual analysis for censored duration data, Economics letters, 18 (1), pp. 35-38, DOI: 10.1016/0165-1765(85)90074-6
  24. Landry S and Callimaci A. (2003), The effect of management incentives and cross-listing status on the accounting treatment of R&D spending, Journal International Accounting, Auditing & Taxation, 12, pp. 131-152, DOI: 10.1016/j.intaccaudtax.2003.08.003
  25. Lantz J.S. and Sahut J.M. (2005), R&D Investment and the Financial Performance of Technological Firms, International Journal of Business, 10 (3), pp. 251-270.
  26. Ledoux M.J. and Cormier D. (2011), Market Assessment of Intangibles and Voluntary Disclosure about Innovation: The Incidence of IFRS, ESG, 4, Cahier de recherche.
  27. Lev B. and Sougiannis T. (1996), The capitalization, amortization, and value-relevance of R&D, Journal of Accounting and Economics, 21 (1), pp. 107-138, DOI: 10.1016/0165-4101(95)00410-6
  28. Lev B., Sarath B. and Sougiannis T. (2005), R&D Reporting biases and their consequences, Contemporaney Accounting Research, 22 (4), pp. 977-1026, DOI: 10.1506/7XMH-QQ74-L6GG-CJRX
  29. Lev B. and Sougiannis T. (1999), Penetrating the book-to-market black box: the R&D effect, Journal of Business Finance and Accounting, 26 (3/4), pp. 419-460, DOI: 10.1111/1468-5957.00262
  30. Lucianetti L., Cocco A. and Minunno G. (2011), La rilevazione degli investimenti in R&S e la significatività dell’utile e del capitale netto, Financial Reporting, 3, pp. 45-74, DOI: 10.3280/FR2011-00300
  31. Markarian G., Pozza P. and Prencipe A. (2007), Capitalization of R&D costs and earnings management: evidence from Italian listed companies, The International Journal of Accounting, 43, pp. 246-267, DOI: 10.1016/j.intacc.2008.06.002
  32. McNichols M. (2000), Research Design Issues in Earnings Management Studies, Journal of Accounting and Public Policy, 19 (4-5), pp. 313-345, DOI: 10.1016/S0278-4254(00)00018-1
  33. Mechelli A. and Cimini R. (2013); Assessing value relevance of comprehensive income in European banks and other financial institutions, Financial Reporting, 1, pp. 13-41, DOI: 10.3280/FR2013-001003
  34. Neffati A., Fred I.B. and Schalck C. (2011), Earnings management, risk and corporate governance in US companies, Corporate Ownership and Control, 8 (2), pp. 170-176.
  35. Oswald D.R. (2008), The Determinants and Value Relevance of the Choice of Accounting for Research and Development Expenditures in the United Kingdom, Journal of Business Finance and Accounting, 35 (1/2), pp. 1-24, DOI: 10.1111/j.1468-5957.2007.02060.x
  36. Oswald D.R. and Zarowin P. (2007), Capitalization of R&D and the Informativeness of Stock Prices, European Accounting Review, 16 (4), pp. 703-726, DOI: 10.1080/09638180701706815
  37. Prencipe A., Markarian G. and Pozza, L. (2008), Earnings Management in Family Firms: Evidence From R&D Cost Capitalization in Italy, Family Business Review, 21(1). pp. 71-88, DOI: 10.1111/j.1741-6248.2007.00112.x
  38. Richter B. (1995), The role of Science in our society, Presented at the Unity of Physics Day Joint Symposium of the American Physical Society and American Association of Physics Teachers, (Washington, DC, USA).
  39. Schipper K. (1989), Commentary on Earnings Management, Accounting Horizons, 3(4), pp. 91-102.
  40. Shapiro S.S. and Wilk M.B. (1965), An analysis of variance test for normality (complete samples), Biometrika, 52 (3-4), pp. 591-611, DOI: 10.1093/biomet/52.3-4.591
  41. Sougiannis T. (1994), The accounting based valuation of corporate R&D, The Accounting Review, 69, pp. 44-68.
  42. Teodori C. and Veneziani M. (2010), Intangible assets in annual reports: a disclosures index, Paper del Dipartimento di Economia Aziendale, Università degli Studi di Brescia.
  43. Tsoligkas F. and Tsalavoutas I. (2011), Value relevance of R&D in the UK after IFRS mandatory implementation, Applied Financial Economics, 21 (13), pp. 957-967, DOI: 10.1080/09603107.2011.556588
  44. White H. (1980), A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test of Heteroskedasticity, Econometrica, 48 (4), pp. 817-838, DOI: 10.2307/1912934
  45. Wilcoxon R. (1945), Individual comparisons by ranking methods, Biometrics, 1, pp. 80-83, DOI: 10.2307/3001968

  • Are tax incentives determinant and relevant for capitalizing R&D expenditures? Evidence from Europe Giuseppe Di Martino, Grazia Dicuonzo, Arcangelo Vitelli, Vittorio Dell’Atti, in FINANCIAL REPORTING 2/2020 pp.63
    DOI: 10.3280/FR2020-002003
  • The Relationship Between Enterprise Financial Risk and R&D Investment Under the Influence of the COVID-19 Xinfei Li, Baodong Cheng, Yueming Li, Jingyang Duan, Yuan Tian, in Frontiers in Public Health 910758/2022
    DOI: 10.3389/fpubh.2022.910758

Riccardo Cimini, Alessandro Gaetano, Alessandra Pagani, The relation between R&D accounting treatment and the risk of the firm: Evidence from the Italian market in "FINANCIAL REPORTING" 1/2014, pp 33-54, DOI: 10.3280/FR2014-001002