IDEAS home Printed from https://ideas.repec.org/a/kap/rqfnac/v46y2016i3d10.1007_s11156-014-0482-0.html
   My bibliography  Save this article

Capitalizing R&D expenses versus disclosing intangible information

Author

Listed:
  • Mustafa Ciftci

    (American University of Sharjah)

  • Nan Zhou

    (State University of New York at Binghamton)

Abstract

We study how to improve the value-relevance of financial information for intangible-intensive firms by investigating two alternatives: capitalizing research and development (R&D) expenses and disclosing intangible information. Using patent counts/citations to proxy for intangible intensity, we find that the incremental value-relevance of disclosing patent counts/citations is greater than that of capitalizing R&D expenses for the high-patent group and vice versa for the low- or medium-patent group. Investors favor the disclosure of patent information for firms with more successful innovations. Since disclosing intangible information may lead to appropriation by rivals, we find that, for the high-patent group, the incremental value-relevance of disclosing patent counts/citations is more pronounced for firms in industries with stronger protection of intellectual property. Overall, our results suggest that disclosing R&D outputs can improve the value-relevance of financial statements for firms rich in intangibles and the incremental benefits of such disclosure will be greater in industries with strong protection of intellectual property.

Suggested Citation

  • Mustafa Ciftci & Nan Zhou, 2016. "Capitalizing R&D expenses versus disclosing intangible information," Review of Quantitative Finance and Accounting, Springer, vol. 46(3), pages 661-689, April.
    • Handle: RePEc:kap:rqfnac:v:46:y:2016:i:3:d:10.1007_s11156-014-0482-0
    DOI: 10.1007/s11156-014-0482-0
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11156-014-0482-0
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11156-014-0482-0?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Re‐Jin Guo & Baruch Lev & Nan Zhou, 2004. "Competitive Costs of Disclosure by Biotech IPOs," Journal of Accounting Research, Wiley Blackwell, vol. 42(2), pages 319-355, May.
    2. Holthausen, Robert W. & Watts, Ross L., 2001. "The relevance of the value-relevance literature for financial accounting standard setting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 3-75, September.
    3. Bronwyn H. Hall & Adam B. Jaffe & Manuel Trajtenberg, 2001. "The NBER Patent Citation Data File: Lessons, Insights and Methodological Tools," NBER Working Papers 8498, National Bureau of Economic Research, Inc.
    4. Tim Eaton & John Nofsinger & Daniel Weaver, 2007. "Disclosure and the cost of equity in international cross-listing," Review of Quantitative Finance and Accounting, Springer, vol. 29(1), pages 1-24, July.
    5. Zvi Griliches, 1998. "Patent Statistics as Economic Indicators: A Survey," NBER Chapters, in: R&D and Productivity: The Econometric Evidence, pages 287-343, National Bureau of Economic Research, Inc.
    6. Bixia Xu & Michel L. Magnan & Paul E. André, 2007. "The Stock Market Valuation of R&D Information in Biotech Firms," Contemporary Accounting Research, John Wiley & Sons, vol. 24(4), pages 1291-1318, December.
    7. Bixia Xu, 2006. "R&D Progress, stock price volatility, and post-announcement drift: An empirical investigation into biotech firms," Review of Quantitative Finance and Accounting, Springer, vol. 26(4), pages 391-408, June.
    8. Howard Chan & Robert Faff & Philip Gharghori & Yew Ho, 2007. "The relation between R&D intensity and future market returns: does expensing versus capitalization matter?," Review of Quantitative Finance and Accounting, Springer, vol. 29(1), pages 25-51, July.
    9. Amir, Eli & Lev, Baruch, 1996. "Value-relevance of nonfinancial information: The wireless communications industry," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 3-30, October.
    10. Darrough, Masako N. & Stoughton, Neal M., 1990. "Financial disclosure policy in an entry game," Journal of Accounting and Economics, Elsevier, vol. 12(1-3), pages 219-243, January.
    11. Bronwyn H. Hall & Adam Jaffe & Manuel Trajtenberg, 2005. "Market Value and Patent Citations," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 16-38, Spring.
    12. Louis K. C. Chan & Josef Lakonishok & Theodore Sougiannis, 2001. "The Stock Market Valuation of Research and Development Expenditures," Journal of Finance, American Finance Association, vol. 56(6), pages 2431-2456, December.
    13. Wesley M. Cohen & Richard R. Nelson & John P. Walsh, 2000. "Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not)," NBER Working Papers 7552, National Bureau of Economic Research, Inc.
    14. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-333, March.
    15. repec:fth:harver:1473 is not listed on IDEAS
    16. Barth, Mary E. & Beaver, William H. & Landsman, Wayne R., 1998. "Relative valuation roles of equity book value and net income as a function of financial health," Journal of Accounting and Economics, Elsevier, vol. 25(1), pages 1-34, February.
    17. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    18. Aboody, D & Lev, B, 1998. "The value relevance of intangibles: The case of software capitalization," Journal of Accounting Research, Wiley Blackwell, vol. 36, pages 161-191.
    19. I Han & Cheng-Min Chuang, 2011. "The Impacts of R&D Investment on Company Performance: US vs. Taiwanese Technology-Intensive Industry," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 14(01), pages 171-194.
    20. Paul M. Healy & Amy P. Hutton & Krishna G. Palepu, 1999. "Stock Performance and Intermediation Changes Surrounding Sustained Increases in Disclosure," Contemporary Accounting Research, John Wiley & Sons, vol. 16(3), pages 485-520, September.
    21. Dong-Hoon Yang & Youngsun Kwon & Jae Jeung Rho & Mikyoung Ha, 2003. "The Value Drivers of US Internet Retailers," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 6(03), pages 253-271.
    22. Lev, Baruch & Sougiannis, Theodore, 1996. "The capitalization, amortization, and value-relevance of R&D," Journal of Accounting and Economics, Elsevier, vol. 21(1), pages 107-138, February.
    23. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    24. Christine A. Botosan & Marlene A. Plumlee, 2002. "A Re‐examination of Disclosure Level and the Expected Cost of Equity Capital," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 21-40, March.
    25. Ciftci, Mustafa & Cready, William M., 2011. "Scale effects of R&D as reflected in earnings and returns," Journal of Accounting and Economics, Elsevier, vol. 52(1), pages 62-80, June.
    26. Chen-Lung Chin & Picheng Lee & Hsin-Yi Chi & Asokan Anandarajan, 2006. "Patent Citation, R&D Spillover, and Tobin's Q: Evidence from Taiwan Semiconductor Industry," Review of Quantitative Finance and Accounting, Springer, vol. 26(1), pages 67-84, February.
    27. Verrecchia, Robert E., 2001. "Essays on disclosure," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 97-180, December.
    28. Mustafa Ciftci, 2010. "Accounting Choice and Earnings Quality: The Case of Software Development," European Accounting Review, Taylor & Francis Journals, vol. 19(3), pages 429-459.
    29. David H. Erkens, 2011. "Do Firms Use Time‐Vested Stock‐Based Pay to Keep Research and Development Investments Secret?," Journal of Accounting Research, Wiley Blackwell, vol. 49(4), pages 861-894, September.
    30. Hsu-Ling Chang & Chi-Wei Su, 2010. "Is R&D Always Beneficial?," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 13(01), pages 157-174.
    31. Lev, B & Zarowin, P, 1999. "The boundaries of financial reporting and how to extend them," Journal of Accounting Research, Wiley Blackwell, vol. 37(2), pages 353-385.
    32. Wagenhofer, Alfred, 1990. "Voluntary disclosure with a strategic opponent," Journal of Accounting and Economics, Elsevier, vol. 12(4), pages 341-363, March.
    33. Collins, Daniel W. & Maydew, Edward L. & Weiss, Ira S., 1997. "Changes in the value-relevance of earnings and book values over the past forty years," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 39-67, December.
    34. Trueman, B & Wong, MHF & Zhang, XJ, 2000. "The eyeballs have it: Searching for the value in internet stocks," Journal of Accounting Research, Wiley Blackwell, vol. 38, pages 137-162.
    35. Xiaoyan Cheng & David Smith, 2013. "Disclosure versus recognition: the case of expensing stock options," Review of Quantitative Finance and Accounting, Springer, vol. 40(4), pages 591-621, May.
    36. Mary E. Barth & Ron Kasznik & Maureen F. McNichols, 2001. "Analyst Coverage and Intangible Assets," Journal of Accounting Research, Wiley Blackwell, vol. 39(1), pages 1-34, June.
    37. Hirschey, Mark & Richardson, Vernon J & Scholz, Susan, 2001. "Value Relevance of Nonfinancial Information: The Case of Patent Data," Review of Quantitative Finance and Accounting, Springer, vol. 17(3), pages 223-235, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yasean A. Tahat & Ahmed H. Ahmed & Mohammad M. Alhadab, 2018. "The impact of intangibles on firms’ financial and market performance: UK evidence," Review of Quantitative Finance and Accounting, Springer, vol. 50(4), pages 1147-1168, May.
    2. Lin Tian & Liang Han, 2019. "How local is local? Evidence from bank competition and corporate innovation in U.S," Review of Quantitative Finance and Accounting, Springer, vol. 52(1), pages 289-324, January.
    3. Cheng-Few Lee & Chengru Hu & Maggie Foley, 2021. "Differential risk effect of inside debt, CEO compensation diversification, and firm investment," Review of Quantitative Finance and Accounting, Springer, vol. 56(2), pages 505-543, February.
    4. Suyon Kim & Jaehong Lee, 2020. "Accounting Treatment of R&D for Environmentally Responsible Firms: Evidence from South Korea," Sustainability, MDPI, vol. 12(8), pages 1-16, April.
    5. Ijaz Hussain & Shaohong Mu & Muhammad Mohiuddin & Rizwan Qaiser Danish & Shrafat Ali Sair, 2020. "Effects of Sustainable Brand Equity and Marketing Innovation on Market Performance in Hospitality Industry: Mediating Effects of Sustainable Competitive Advantage," Sustainability, MDPI, vol. 12(7), pages 1-19, April.
    6. Georgiou, Andreas, 2022. "A Case Study of Investor R&D Evaluation using Game Theory," Proceedings of the ENTRENOVA - ENTerprise REsearch InNOVAtion Conference (2022), Hybrid Conference, Opatija, Croatia, in: Proceedings of the ENTRENOVA - ENTerprise REsearch InNOVAtion Conference, Hybrid Conference, Opatija, Croatia, 17-18 June 2022, pages 91-98, IRENET - Society for Advancing Innovation and Research in Economy, Zagreb.
    7. Lin Tian & Liang Han & Biao Mi, 2020. "Bank competition, information specialization and innovation," Review of Quantitative Finance and Accounting, Springer, vol. 54(3), pages 1011-1035, April.
    8. Darya Dancaková & Jakub Sopko & Jozef Glova & Alena Andrejovská, 2022. "The Impact of Intangible Assets on the Market Value of Companies: Cross-Sector Evidence," Mathematics, MDPI, vol. 10(20), pages 1-14, October.
    9. Qianhui Ma & Lan Ju & Zishi Zhang, 2022. "Innovation Input and Firm Value: Based on the Moderating Effect of Internal Control," Sustainability, MDPI, vol. 14(18), pages 1-24, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Pervaiz Alam & Min Liu & Xiaofeng Peng, 2014. "R&D expenditures and implied equity risk premiums," Review of Quantitative Finance and Accounting, Springer, vol. 43(3), pages 441-462, October.
    2. Mustafa Ciftci & Masako Darrough, 2015. "What Explains the Valuation Difference between Intangible-intensive Profit and Loss Firms?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(1-2), pages 138-166, January.
    3. Mark Aleksanyan & Khondkar Karim, 2013. "Searching for value relevance of book value and earnings: a case of premium versus discount firms," Review of Quantitative Finance and Accounting, Springer, vol. 41(3), pages 489-511, October.
    4. Jihene Chedlia Soussi, 2012. "Impact of Voluntary Disclosure on the Relevance of Accounting Information," Journal of Education and Vocational Research, AMH International, vol. 3(5), pages 138-153.
    5. Hirshleifer, David & Hsu, Po-Hsuan & Li, Dongmei, 2013. "Innovative efficiency and stock returns," Journal of Financial Economics, Elsevier, vol. 107(3), pages 632-654.
    6. Atoche, Teresa duarte & Pérez lópez, José ángel & Camúñez ruiz, Jose antonio, 2012. "La relevancia de los gastos de I+D. Estudio empírico en el sector del automóvil," Revista de Contabilidad - Spanish Accounting Review, Elsevier, vol. 15(2), pages 257-286.
    7. Ciftci, Mustafa & Cready, William M., 2011. "Scale effects of R&D as reflected in earnings and returns," Journal of Accounting and Economics, Elsevier, vol. 52(1), pages 62-80, June.
    8. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    9. Schaberl, Philipp D., 2016. "Beyond accounting and back: An empirical examination of the relative relevance of earnings and “other” information," Advances in accounting, Elsevier, vol. 35(C), pages 98-113.
    10. Healy, Paul M. & Palepu, Krishna G., 2001. "Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 405-440, September.
    11. David Hirshleifer & Po-Hsuan Hsu & Dongmei Li, 2018. "Innovative Originality, Profitability, and Stock Returns," The Review of Financial Studies, Society for Financial Studies, vol. 31(7), pages 2553-2605.
    12. Jesse A. Ellis & C. Edward Fee & Shawn E. Thomas, 2012. "Proprietary Costs and the Disclosure of Information About Customers," Journal of Accounting Research, Wiley Blackwell, vol. 50(3), pages 685-727, June.
    13. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    14. Callen, Jeffrey L. & Gavious, Ilanit & Segal, Dan, 2010. "The complementary relationship between financial and non-financial information in the biotechnology industry and the degree of investor sophistication," Journal of Contemporary Accounting and Economics, Elsevier, vol. 6(2), pages 61-76.
    15. Griffin, Paul A. & Hong, Hyun A. & Ryou, Ji Woo, 2018. "Corporate innovative efficiency: Evidence of effects on credit ratings," Journal of Corporate Finance, Elsevier, vol. 51(C), pages 352-373.
    16. Denise A. Jones, 2018. "Using real options theory to explain patterns in the valuation of research and development expenditures," Review of Quantitative Finance and Accounting, Springer, vol. 51(3), pages 575-593, October.
    17. Neeraj J. Gupta & Joseph Golec, 2012. "Do Investors Use Customer Metrics To Value High Growth Service Firms?," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 6(2), pages 1-19.
    18. Tami Dinh Thi & Wolfgang Schultze, 2011. "Capitalizing research & development and ‘other information’: the incremental information content of accruals versus cash flows," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 22(3), pages 241-278, November.
    19. Barth, Mary E. & Konchitchki, Yaniv & Landsman, Wayne R., 2013. "Cost of capital and earnings transparency," Journal of Accounting and Economics, Elsevier, vol. 55(2), pages 206-224.
    20. Kannan, Yezen & Khallaf, Ashraf & Gleason, Kimberly & Bostan, Ibrahim, 2023. "The relationship between R&D intensity, conservatism, and management earnings forecast issuance," Advances in accounting, Elsevier, vol. 62(C).

    More about this item

    Keywords

    Intangible disclosure; R&D capitalization; Patent; Value-relevance;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:rqfnac:v:46:y:2016:i:3:d:10.1007_s11156-014-0482-0. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.