Accounting Rules and Investment Efficiency: The Case of Capitalizing Costs of Software Development and R&D

• In Event: Usefulness of Accounting Information

Abstract

This paper investigates the impact of accounting rules regarding the capitalization of expenditures in selective intangible assets on firms’ investment efficiency (under-/over-investment) of such investments. It exploits two separate institutional settings: first, rules allowing the capitalization of software development, but not research and development (R&D), costs in the United States and second, the capitalization of R&D in the United Kingdom. Prior research suggests that rules mandating the immediate expensing of costs incurred in generating intangible assets (such as R&D and advertising) can lead to under-investment especially in the presence of managerial myopia. We investigate whether the capitalization of such assets while mitigating under-investment can in fact induce over-investment. Our findings are consistent with these predictions. Our research contributes to the debate on accounting for self-generated intangibles focusing on real investment effects.

Authors

• Tami Dinh, University of St Gallen

• Baljit K Sidhu, University of New South Wales