Is there a correlation between the R&D accounting treatment and the risk of the
firm? Evidence from Italy.
Riccardo Cimini (§§ 3, 4, 5)
Ph.D. Student in Management and Organization of the Firm
University of Rome “Tor Vergata”
Via Columbia 2, 00133
Rome, Italy
Phone: +39 06 72595751, Fax: +39 06 72595804
e-mail: riccardo.cimini@uniroma2.it
Alessandro Gaetano (§ 1)
Full Professor of Accounting
University of Rome “Tor Vergata”
Via Columbia 2, 00133
Rome, Italy
Phone: +39 06 72595801, Fax: +39 06 72595804
e-mail: gaetano@uniroma2.it
Alessandra Pagani (§§ 2, 6)
Ph.D. Student in Management and Organization of the Firm
University of Rome “Tor Vergata”
Via Columbia 2, 00133
Rome, Italy
Phone: +39 06 72595751, Fax: +39 06 72595804
e-mail: alessandra.pagani@uniroma2.it
Is there a correlation between the R&D accounting treatment and the risk of the firm?
Evidence from Italy.
Abstract
The research and development (R&D) accounting treatment is an open debate for academics and
practitioners.
This study contributes to the ongoing debate about capitalization or expensing of R&D
expenditures and investigates the existence of a correlation between the attitude to recognize the
R&D expenditures as expenses or as capital assets and the operating risk of the firm.
This work aims to study this topic on a sample of 137 companies listed on the Italian Stock
Exchange in 2009, not considering banks and other financial institutions.
Our findings emphasize that the R&D accounting treatment depends on the sector they belong to
and that recognizing R&D expenditures as expenses identifies the firms with a higher degree of
risk. So, in line with a strand of literature on R&D accounting treatment, this research evidences
that the capitalization is preferable because the market perceives that the entity has a lower risk.
Keywords: R&D expenditures; R&D accounting treatment; IAS 38; operative risk.
2
1. Introduction
In the knowledge economy era, the Research and Development (R&D) investments have a crucial
role, as the proliferation of successful R&D projects can really promote the development and
increasing wealth of the firm.
This paper aims to investigate their accounting treatment and the correlation of this choice with the
risk of the company.
As to accounting treatment, according to the Financial Accounting Standards Board (FASB), R&D
must be immediately expensed in the statement of net income and comprehensive income (SFAS n.
2); instead, the International Accounting Standard Board (IASB) also allows capitalization of R&D
expenditures, under specific circumstances (IAS 38).
In this regard, FASB justified the immediately expenditures of all R&D costs on the grounds that
there is not an evident and consistent association between R&D outlays and subsequent economic
benefits for any specific R&D project. Instead, in IAS 38, while research expenditures may not be
capitalized, development costs could be accounted as an asset only if they respect restrictive
criteria1.
Like the IAS 38, the Italian Accounting Standard n. 24 allows some flexibility on the R&D
accounting treatment. However, according to the article 2426 of the Italian Civil Code, the
capitalization method must be authorized by the statutory auditors and it is not possible to pay
dividends until there are enough retained earnings to cover the capitalized R&D that are still not
amortized.
1
Research expenditures may not be capitalized and development costs could be recognized as an asset only if the
company fulfils six restrictive requirements: (1) the technical feasibility to complete the intangible asset for use or sale;
(2) the firms must intend to complete the asset for use or sale; (3) it must be able to actually use or sell the intangible
asset; (4) there must be a reasonable certainty that the intangible asset will generate future economic benefits; (5) there
must be available technical, financial and other resources required for the completion of the asset and its sale or use; and
(6) the firm must be able to measure the expenditure attributable to the intangible asset during its developmental phase.
3
Expensing means that yearly (or quarterly) R&D expenditures are subtracted from revenues during
the process of calculating net income; instead, capitalizing means reporting them in the statement of
financial position that is possible when insiders expect future benefits.
So, on average, R&D expenditures are associated with future earnings but it isn’t true for every
single R&D project. Consequently, if R&D expenditures provide economic benefits in the future,
then capitalizing them is optimal; on the contrary, expensing is desirable.
Over the years, several studies underline that the choice of R&D accounting treatment generates
different consequences on performances, disclosure, value and risk of the firm.
This paper aims to investigate if there is a relationship between the selected R&D accounting
treatment and the operating risk of the firm.
To verify whether such accounting treatment is correlated with the operative risk of the firm, we
collected data from the consolidated financial statements of 137 companies listed on the Italian
Stock Exchange in 2009.
Following Lantz and Sahut (2005), we calculated three indexes that show the preferences of firms
to report R&D expenditures in the income statement or in the statement of financial position.
Subsequently, we correlated these indicators with the operating risk of the company, which in our
case is represented by the beta unlevered.
Our results confirmed that the recognition of the R&D expenditures as expenses identifies the firms
with a higher degree of risk; on the contrary, if the entities decide to capitalize the R&D
expenditures, the perceived risk of the firm by the market is lower.
In this paper we would like to give a contribute to the existing literature, that in Italy has never
investigated the correlation between the R&D accounting treatment and the operating risk of firms.
In addition to contributing to the literature, this paper also has implications for practitioners and
standard setters.
4
To practitioners, this paper suggests that capitalizing or considering R&D expenditures as costs has
an impact on the outsiders’ perception of the risk of firms.
To standard setters, this research would like to suggest that accounting discretion should be limited.
Our paper continues as follows.
In section 2, we will review the literature about R&D expenditures taking into particular account the
research that investigates the correlation between the accounting treatment and the operative risk of
the firm.
In section 3, we will focus on our research design.
Section 4 is about our sample selection strategy and descriptive statistics of collected data.
In section 5, we will show our results;
Section 6 is the conclusion of the work and contains its further future developments.
2. Literature review
The research and development (R&D) accounting treatment is a controversial issue. Over the years,
several aspects have been investigated by scholars.
In the introduction of this work, we have underlined that the principal characteristic that
discriminates an asset from an expenditure is the possibility to create future benefits for firms.
Moving from this distinction, Lev and Sougiannis (1996), Healy et al. (2002) and Chambers et al.
(2003) studied the R&D accounting treatment as a tool to discriminate between good and bad R&D
projects. Other scholars have investigated whether such accounting treatment leads to an erosion in
the informative quality of financial reporting (Ledoux and Cormier 2011; Lev and Sougiannis,
1999; Teodori and Veneziani, 2010). Anagnostopoulou (2010) suggests that the choice of the R&D
accounting treatment is related to inaccuracy and errors in earnings forecasts.
5
Academics also have focused on the relationship between R&D expenditures and future earnings
(Cazavan-Jeny et al. 2011; Lev and Sougiannis, 1996; Lev and Sougiannis, 1999; Markarian, Pozza
et Prencipe, 2008) or have estimated the economic value of R&D intangible assets (Ballester et al.
2003). For instance, Markarian et al. (2007) demonstrated that firms with a lower return on assets
are more likely to recognize R&D expenditures as assets; on the contrary, firms that have improved
their profits are more likely to recognize R&D expenditures as expenses.
Between the value relevance studies, the ones of Cazavan-Jeny and Jeanjean (2006), Oswald and
Zarowin (2007), Tsoligkas and Tsalavoutas (2011) have assessed the value relevance of the
different R&D accounting methods.
Besides the literature about financial disclosure, several scholars have investigated R&D
expenditures: for instance, Teodori and Veneziani (2010) in the Italian context and Lev et al. (1999)
at an international level.
Finally, several studies have investigated the correlation with the firm value (Cazavan-Jeny et al.
2011; Lantz and Sahut, 2005). These researches have tried to find a positive relationship between
R&D expenditures and returns or highlighted that the stock exchange prices depend on the different
grade of competition in the sector and are in a positive relation with the R&D costs.
Among the ones that found a positive relation between the level of R&D expenditures and the
firm’s value, there are Bublitz and Ettredge (1989), Sougiannis (1994) and Lev and Sougiannis
(1996) who have provided evidence that the growth of R&D investments are positively correlated
with subsequent earnings. Similar results have been achieved by Lev and Sougiannis (1996) who
found a significant and inter-temporal association between capitalized R&D and future stock
returns.
This paper aims to contribute to the ongoing debate on capitalizing or expensing R&D expenditures
and investigates the existence of a correlation between the risk of the company and its attitude to
recognize the R&D expenditures as expenses or as capital assets.
6
In literature, proponents of the expensing method argue that the capitalization method allows
managers to manipulate earnings and asset values, as the amount of R&D costs to be capitalized are
subjective. On the contrary, expensing is preferable to capitalization because it eliminates the
possibility for managers to capitalize costs of R&D projects that have a low probability of success.
Despite the arguments that support the expensing method, it’s important to note that also with this
method reported earnings could also be manipulated.
In fact, when the R&D investments are recognized as expenses, the decision to reduce future R&D
investments increases the reported earnings and could influence the outsiders perception of the
firm’s performance.
Consequently, proponents of the capitalization method argue that when R&D is capitalized, a real
decrease in R&D expenditures will have a small immediate effect on earnings, so it is more difficult
that outsiders mislead the economic performance.
On this point, Lev et al. (1999) showed that the immediate expensing of R&D may induce a
relevant reporting bias. In fact, for their essence, R&D investments are subject to high asymmetric
information2 between the firm and the market participants (Aboody and Lev, 2001) that increases
the firm’s risk perceived by the investors because the future value of R&D projects is not
guaranteed.
As to this perception, Lev et Sougiannis (1996) highlighted that, on average, R&D expenditures are
considered by investors an amortizable asset rather than an expense.
Even though the study of Ho et al. (2004), demonstrated that the capitalization of R&D
expenditures is linked with a high beta risk, the research of Lantz and Sahut (2005) showed that the
risk of a firm increases with high R&D expenses and low intangible assets.
2
For more information see: Agrawal A. and Knoeber C.R. (1996), Firm performance and mechanisms to control
agency problems between managers and shareholders, Journal of financial and quantitative analysis, 31 (3), pp. 377397 and Jensen M.C. and Meckling W.H. (1976), Theory of the firm: managerial behaviour, agency costs and
ownership structure, Journal of Financial Economics, 4, pp. 305-360.
7
As far as we are concerned, proponents of capitalization have produced more a persuasive argument
than scholars who suggest to expensing all the R&D expenditures in the statement of net income
and comprehensive income. So, in this paper, moving from the work of Lantz and Sahut (2005), we
formulate the following hypothesis.
Hypothesis 1: the risk of the firm is higher when R&D investments are accounted as expenses.
3. Methodology
This research aims to investigate the existence of a correlation between the attitude to recognize the
R&D expenditures as expenses or capital assets and the operating risk of the firm. In other words,
we study whether the risk perceived by investors is correlated to how insiders have exercised
accounting discretion in considering R&D as costs or capital assets.
To answer our research question, following Lantz and Sahut (2005), in a first step we have
calculated three indexes, in order to show the preferences of the firms to report the R&D
expenditures in the statement of net income and comprehensive income or in the statement of
financial position. In a second step, we have correlated these indexes with a measure of the
operating risk of the company, that in our case has been measured with beta unlevered.
The indexes useful for our analysis are the so called R&D expenses ratio, calculated by dividing
the R&D expenses and the EBIT (
R&𝐷 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
EBIT
), the R&D capitalization ratio, calculated by
dividing the Intangible assets and the R&D expenses (
Intangible assets
R&𝐷 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
) and the intangibility of the
Intangible assets
firm, calculated by dividing the intangible assets with the total assets (
It is worth explaining what these indexes mean.
8
Total assets
).
The “R&D expenses ratio” measures the weight of R&D expenses respect to the reported EBIT and
is a measure very useful to detect the attitude of the firm to recognize the R&D expenditures in the
statement of net income and comprehensive income. Therefore, the more this index is high, the
more the firm has large expenses in R&D compared to the EBIT.
Correlating this index with our measure of operating risk (beta unlevered), we would like to study
whether the entities that use to account R&D as expenses are the riskier ones.
The “R&D capitalization ratio” measures the amount of intangible assets compared to R&D
expenses. It is a good proxy whose purpose is detecting the attitude of the firms to recognize their
R&D expenditures in the statement of financial position. Therefore, the more this index is high the
more firms have large intangible assets compared to R&D expenses.
Correlating this index with our measure of operating risk (beta unlevered), we would like to study
whether the entities that use to account R&D as capital assets are the riskier ones.
The “intangibility of the firm” measures the amount of intangible assets compared to the total
assets. Like the second one, this index is also useful to evaluate the firms’ attitude to capitalize
R&D expenditures.
The Pearson correlations matrix is the statistical tool that we have used in order to evaluate whether
the operating risk perceived by investors (measured by beta unlevered) is correlated to how insiders
have exercised accounting discretion in considering R&D as costs or capital assets (measured by
our indexes).
Finally, as in Lantz and Sahut (2005), we have done a cluster analysis in order to confirm and
improve the results held with the correlation analysis.
In a more detail, putting the beta unlevered and the natural logarithm of net income 3 respectively on
the x-ass and the y-ass and splitting them at the median, we have divided our entities in 4 clusters
3
Colin et al. (2009) explain that using the natural logarithm of total assets eliminates the skewness and the excess of
kurtosis.
9
and for each of them we have investigated whether reporting discretion influences the perceived
risk (and return) of the firms.
4. Sample selection and descriptive statistics
To answer our research question, we collected data through the firms’ consolidated financial
statements of 137 companies listed on the Italian Stock Exchange in 2009, not considering banks
and other financial institutions. Whether not available, data have been collected making a phone
survey.
According to our sample selection strategy, we excluded entities for which no data were available
and the ones whose fiscal year do not end at 31st December, in order to have data at the same
reporting date.
We have also excluded groups which do not adopt the IASB standards and groups that were in a
bankruptcy or in a liquidation procedure, for homogeneity issues.
Table 1 shows that in 2009, only 109 entities invested in R&D.
Table 1: The composition of the sample
Number
109
28
137
Entities that invested in R&D
Entities that did not invested in R&D
Total:
Percentage
80%
20%
100%
Taking into account the 109 entities, which invested in R&D, we would like to investigate whether
the R&D accounting treatment is correlated with the operating risk of the firm.
10
According to the IAS 38 accounting standard, these entities had distinguished in their investment
project the phase of research from the one of development to decide whether to expense or
capitalize the associated R&D expenditures.
In 2009, 42 entities (39%) invested both in research and development so in the consolidate financial
statements they reported these expenditures as expenses or capital assets.
The remaining 67 entities (61%) have invested either in research or in development. More in detail,
within these last ones, 34 entities have recognized in their investment only the phase of “research”,
reporting them in the statement of net income and comprehensive income as expenses; the other 33
firms have recognized only the phase of “development”, capitalizing the correlated costs in the
statement of financial position.
Table 2 shows our findings.
Table 2: The kind of R&D expenditures
N. of entities that have
invested
Percentage
in research
34
in development
33
67
61%
both in R&D
Total
42
109
39%
100%
Before showing the Pearson correlations matrix, Table 3 gives the evidence of the industries, which
the 109 entities belong to.
Travel and leisure
Telecommunicatio
ns
29
10
21
2
3
3
3
2
11
13
Total
Media
8
Technology
Health care
1
House hold goods
4
Automobiles &
parts
Food and beverage
Basic material
Oil and gas
Retail
2
Industrial goods &
services
1
Construction &
materials
7
Chemicals
Public utilities
Table 3: Number of firms belonging to the different industries
109
Finally, Table 4 shows the average and the median values of the “R&D expenses ratio”
R&𝐷 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
Intangible assets
EBIT
R&𝐷 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
(
), the “R&D capitalization ratio” (
) and the “intangibility of the firm”
Intangible assets
(
Total assets
) for the industries indicated in Table 3.
Table 4: The average and median of our indexes in the different industries
Public utilities
Chemicals
Retail
Oil and gas
Basic material
Construction & materials
Industrial goods &
services
Automobiles & parts
Food and beverage
Household goods
Healthcare
Media
Travel and leisure
Telecommunication
Technology
Total:
Wilcoxon signed-ranks
test (p-values)
R&𝐷 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
Intangible assets
Intangible assets
EBIT
Total assets
R&𝐷 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
average
median average
median
average
median
0.0047
0.0008 329.7870
6.1239
0.0698
0.0299
0.2092
0.2092
1.6157
1.6157
0.1906
0.1906
0.0201
0.0201 496.0000 496.0000
0.0551
0.0551
0.0073
0.0072
9.4017
9.4017
0.0450
0.0710
-0.2410 -0.2410
0
0
0.0020
0.0020
0.1098
0.0703 373.9700 373.9700
0.0473
0.0090
0.0296
0.0043
40.6170
4.5093
0.0573
0.0307
0.5016
0.0049
0.7595
0.0762
0.0003
0
0.3065
-0.0410
0.2140
0.1191
0.0049
0.1293
0.0762
0
0
0.0135
0
0.0020
2.2089
0
121.7420
2.7938
1.0364
118.6710
7.2883
298.5200
127.2818
0.0269
2.1171
0
4.4172
2.7938
1.0364
88.6960
7.2883
9.5099
3.9777
0.0152
0.0689
0.0070
0.9307
0.0620
0.0277
0.1657
0.0568
0.1022
0.2345
0.0588
0.0070
0.0710
0.0620
0.0112
0.2151
0.0729
0.0790
0.0409
0.2116
In each sector and for each ratio, whether the value of the median is not similar to the matched-pair
value of the average, thus outliers exist. In a more clear words, there are firms that belong to a
specific sector that behave differently from the other ones belonging to the same sector, in terms of
R&D accounting treatment.
For each sector, such comparisons could be very interesting to discover whether the R&D
accounting choices are homogeneous or biased by outliers.
12
So, for each index, in order to judge whether average values are statistically equal to the median
ones (null hypothesis), we have tested the null hypothesis that both distributions are the same, by
using the Wilcoxon (1945) signed-ranks test.
With a 5% level of significance, while for the “R&D expenses ratio” and the “R&D capitalization
ratio” the null hypothesis is refused (p-values are respectively 0.0269 and 0.0152), for the
“intangibility of the firm” it cannot be refused (p-value is 0.2116).
Therefore, the “intangibility of the firms” is homogeneous between the firms that belong to a
specific sector or, in a more clear way, the firms belonging to the same industry invest in R&D a
very similar percentage of their total assets.
Despite the same percentage of total asset invested in R&D, within each sector their attitude to
capitalize or to recognize them as expenses is very different, producing significant differences
between the ratios.
For instance, as shown in Table 4, as to “R&D expenses ratio”, such R&D accounting treatment
within the same sector increases the difference between average and median in firms belonging to
public utilities, industrial goods & services, automobiles & parts and household goods industries;
instead, with regard to “R&D capitalization ratio” the difference between average and median is in
the firms belonging to public utilities, industrial goods & services, household goods, travel &
leisure and technology sectors.
5. The Pearson correlations matrix and further analysis
In the Pearson correlation matrix we read the linear correlation between the three indexes presented
above with the operating risk of the firms (beta unlevered).
13
Table 5 shows the coefficients, whose level of significance4 is reported when it is less than 5%.
Table 5: Pearson correlations matrix
R&𝐷 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
EBIT
Intangible assets
R&𝐷 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
Intangible assets
Total assets
Beta unlevered
R&𝐷 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
EBIT
Intangible assets
R&𝐷 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
Intangible assets
Total assets
Beta
unlevered
1.00
-0.0432
1.00
-0.0107
0.3165*
(0.0053)
1.00
0.1937*
(0.0445)
0.0747
-0.0034
1.00
(*) Correlation coefficient with statistical significance less that 5%
The Pearson correlations matrix suggests us that differently from Lantz and Sahut (2005), the R&D
capitalization ratio and the intangibility of the firms seem not to be correlated with the risk of the
company, as the correlations coefficients are not statistically significant.
Instead, the correlations matrix reveals that “R&D expenses ratio” and beta unlevered are
correlated. In a more detail, we observe a significant positive correlation between them (0.1937), so
our findings suggest that the recognition of the R&D expenditures as expenses in the statement of
net income and comprehensive income burdens net income and identifies the riskier entities.
More specifically about the risk, as we read in Lantz and Sahut (2005), the positive correlation with
risk “is due to the fact that these firms would have multiple options of economic exploitations of
this research in the future (real option). However, the fact that they are not marketable immediately
generates a doubt about the economic effectiveness of this research and thus the perceived risk by
investors” (Lantz and Sahut, 2005:263).
4
The statistical significance (p-value) of the correlation indexes allows us to test the null hypothesis that such indexes
are different from zero and the correlated variables could be considered independent.
14
To summarize our findings, the Pearson correlations matrix allows us to conclude that the
recognition of the R&D expenditures as expenses identifies the firms with high degree of risk.
The matrix says nothing about the correlation of R&D accounting treatment and the attitude to
capitalize the R&D expenditure.
In order to investigate this aspect, similarly to Lantz and Sahut (2005), we divided our entities in 4
clusters as showed in Figure 1. where the variables on the axes (beta unlevered and the natural
logarithm of net income) have been split at the median. Choosing the natural logarithm of net
income (a measure of the firms performance) is necessary in order to build a matrix with 4 clusters.
Figure 1 shows our findings.
Figure 1: R&D strategy of the Italian listed company
For each cluster we have calculated the average R&D expenses ratio, the R&D capitalization ratio
and the average beta unlevered.
Our data suggest that firms in cluster 3, whose beta (0.74) is under the median of the distribution
(low) have high “R&D capitalization ratio” (high because 151.42 is bigger than 129.67 and 58.92
15
respectively observed in clusters 1 and 2) and low “R&D expenses ratio” (low because 0.1039 is
less than 0.1709 and 1.10 respectively observed in clusters 2 and 4).
So capitalization of R&D expenditures is associated with lower beta unlevered.
Instead, firms in cluster 2, whose beta (1.30) is over the median of the distribution (high), have low
“R&D capitalization ratio” (low because 58.92 is less than 129.67, 151.42 and 405.28 respectively
observed in clusters 1, 3 and 4) and high R&D expenses ratio (high because 0.1709 is higher than
0.125 and 0.1039 respectively observed in clusters 1 and 3).
So the attitude to expense R&D expenditures is associated with higher beta unlevered.
Clusters 1 and 4 help us to confirm that in the riskier entities the “R&D expenses ratio” is higher
(cluster 4) than the same ratio of the firms with lower beta unlevered (cluster 1).
So, our conclusion is similar to the one joined by Lantz and Sahut (2005). For the entities that have
to decide if capitalize the R&D expenditure or recognize them in the income statement,
capitalization is preferable, because the perceived risk of the firm by the market is lower.
The test of difference of the average rejects the null hypothesis that cluster 3 average beta unlevered
is equal to the one of the firms in cluster 2 (p-value=0), validating our findings.
6. Conclusions
The importance of the R&D accounting treatment arises from the central relevance that R&D
projects have in increasing the innovation capability of the firm and, consequently, their future
economic performances. In fact, as declared by the Nobel winner Burton Richter: “Science, which
is bringing new discoveries expected to create new industries every day, cannot be done without,
for example, the lasers and computers that have been developed from previous science. The pace of
progress in this direction is so fast that for a large number of high-tech industries, today’s
16
technology is based on today’s science [...]”. Briefly, this philosophy could be synthesized by his
following sentence: “Today’s technology is based on yesterday’s science; today’s science is based
on today’s technology” (Richter, 1995:3).
As we said in the introduction, this paper aims to investigate the correlation of R&D accounting
treatment and the risk of the company.
Our findings evidence that the recognition of the R&D expenditures as assets identifies the firms
with low degree of risk; so, if the entities decide to capitalize the R&D expenditure, then the
perceived risk of the firm by the market is lower. On the contrary, our results show that when the
R&D expenditures are accounted as costs, they impact return negatively and identify an R&D
project with a low probably of success: in other words a firm with a high risk profile.
Our conclusions could be justified by the fact that capitalization tends to decrease the information
asymmetry between stakeholders and managers. Furthermore, the capitalized R&D projects are
perceived as profitable and as a source of competitive advantage by the market, so the firm’s risk is
perceived as lower.
Unfortunately, the IASB financial disclosure requirements have not allowed us to distinguish
whether the R&D expenditures have been disclosed in the statement of net income and
comprehensive income because of the low quality of the projects or this policy is due to a prudent
choice of insiders to limit capitalizations, connected to the entity’s capability in value creation.
Without these information, the perceived risk of the entities that account R&D expenditures as a
costs is the same because investors do not know the reason of such accounting choice.
This kind of disclosure not only could improve our analysis, but, if adopted by standard setters, the
informativeness of financial statement becomes more reliable. Consequently, investors are able to
better discriminate the risk according to the accounting treatment chosen.
Other than this limitation, it could be interesting to analyze the R&D accounting treatment in other
EU countries in order to investigate whether our results are confirmed.
17
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