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The Role of R&D Capitalisations in Firm Valuation and Performance Measurement
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Tony Abrahams and Baljit K. Sidhu
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Abstract
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We investigate the value-relevance of capitalised R&D on the balance sheet,
and the extent to which R&D accruals improve the association between accounting-based
measures of firm performance and capital market returns for Australian listed
companies. This is a regulatory setting where management discretion in the
capitalisation decision is permitted and can be empirically observed. The results
suggest that capitalised R&D on the balance sheets of selective capitalisers is
value-relevant; that is, the ability of capitalised R&D to explain information
contained in prices (given information conveyed by other components of the balance
sheet) is statistically significant. For the same group of firms R&D accruals
(particularly the initial capitalisation) improve accounting earnings as a measure
of performance but only for the pooled sample using contemporaneous returns. The
results for the fully expensing sample are less clear, perhaps due to the small
sample size.
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Keywords
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RESEARCH AND DEVELOPMENT; ACCOUNTING ACCRUALS; VALUE RELEVANCE; PERFORMANCE
MEASURES.
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Contact Details
Tony Abrahams
School of Accounting
The University of New South Wales
Sydney NSW 2052
Baljit K. Sidhu
School of Accounting
The University of New South Wales
Sydney NSW 2052
E-mail: B.Sidhu@unsw.edu.au
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We especially thank G. Clinch (the Area Editor),
G. Whittred and an anonymous reviewer
for many helpful suggestions. We also
received useful comments from: M. Daley, D. Dhaliwal,
R. Swieringa, seminar participants at UNSW,
the 1997 conferences of the AAANZ (Hobart), the
IAAER (Paris), and the Asian-Pacific International
Accounting Conference (Bangkok). Finally, thanks
to R. Czernkowski and Ian Huntley Pty Ltd for help
with data collection. B.K. Sidhu acknowledges
financial support from the Australian Research Council.
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