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Earnings Volatility and Market Valuation



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This paper investigates the determinants and value relevance implications of the accounting method choice for development expenditures for firms with research and development (R&D) programs in the United Kingdom (UK). Using a sample of 1,780 UK firm-year observations over 1993-1997, of which I classify 231 (1,549) firm year observations as Capitalizers (Expensers), I find that the decision to expense versus capitalize is influenced by firm size, the intensity of the firm's R&D programs, and whether the firm is in a steady-state with respect to its R&D programs. Results of value relevance tests indicate that Expensers have little to gain, if anything, in terms of value relevance from adjusting their reported earnings and book value of equity to reflect as-if capitalized numbers.. For the Capitalizers, the value relevance of as-if-expensed earnings and book value of equity is not substantially lower than the value relevance of their reported earnings and book value of equity. Additional analysis indicates that the steady-state status and R&D intensity of a firm's R&D programs may marginally influence the value relevance of their financial information. These results are in contrast to those in US studies that find that capitalization of R&D expenditures greatly enhances the value relevance of firms' financial statements.

Series Number

ACCT 019


Accounting Working Paper

Available on ECCH


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