Joint Informational Value to Investors of Patent Portfolio Information and Capitalized Development Costs under IFRS

Accounting information aims to provide reliable information to investors, aiding accurate assessment of the economic value of firms. The full-expensing accounting treatment of investments into innovation and R&D costs in some accounting standards, such as in U.S. GAAP, restricts investors in their ability to infer economic value in firms’ R&D investments. In contrast, IFRS mandates the capitalization of internally generated development costs, enhancing the informativeness of financial statement information for innovative companies. In this study, we examine the value relevance of IFRS-mandated capitalized development costs and how this information complements or substitutes one of the most common non-financial proxies that investors use to infer the economic value of firms’ innovations, i.e., patent portfolio characteristics. We show that both are value relevant, and that information on capitalized development costs is particularly relevant to investors in settings where firms own a moderate number of patents. In contrast, information contained in capitalized development costs appears substitutional to information contained in patent portfolio characteristics where firms own many patents and in R&D intensive settings. Both observations highlight the importance of capitalized development costs as a source of information to investors in their assessment of the economic value of firms’ R&D investments. Our findings are robust for various fixed effect controls, scaling approaches, and split sample analyses.