We examine whether managers signal private information about future performance of the firm through their decision to capitalize or expense R&D expenditures. We find that, after controlling for industry effects, firms that capitalize R&D expenditures spend less on R&D, have more volatile R&D efforts, are smaller, and are poorer performers than firms that expense R&D expenditures. We also find that capitalizers capitalize R&D outlays when they need to meet or beat thresholds. Finally, we show that the decision to capitalize R&D is generally associated with a negative or neutral impact on future performance even after controlling for self-selection. Our results also show that when firms both capitalize and expense their R&D expenditures, the expensed portion exhibits a stronger (and negative) relation with future performance. While we cannot unambiguously establish whether our findings imply that management acts opportunistically or is unable to estimate the earning power of R&D projects, our results suggest that management is unable to truthfully signal future performance through its decision to capitalize R&D. Based on real data as opposed to simulated data, our findings therefore contrast with previous supportive evidence in favor of capitalization in the literature.
JENY, A., JEANJEAN, T. and JOOS, P. (2007). Signaling Future Performance through Accounting Choice: The Case of R&D Accounting in France. In: 28ème Congrès de l'AFC - Comptabilité et environnement (CD-Rom). Association Francophone de Comptabilité (AFC).