Capitalizing research & development and 'other Information': the incremental Information content of accruals versus cash flows

摘要

This paper studies the role of the accrual process for providing value relevant information on intangibles. Expensing research & development (R&D) expenditures is, by nature, equivalent to cash accounting. Prior studies have found that accrual information has superior explanatory power for market val-ues compared to cash flows (Dechow in J. Account. Econ. 18(1):3-42, 1994). We demonstrate, for a sample of German firms, that this also holds true for R&D accounting. By adjusting the earnings we create two samples reflecting R&D capitalization and expensing, respectively. We demonstrate that capitalizing R&D expenditures creates an additional accrual component of earnings which increases the explanatory power of earnings compared to cash flows (expensing) while internalizing 'other information' into the accounting system. This ex-plains the higher value relevance of capitalized R&D compared to expensing estab-lished in prior research (Lev and Sougiannis in J. Account. Econ. 21(1): 107-138, 1996).