R&D Reporting Biases and Their Consequences
The immediate expensing of Ramp;D expenditures is often justified by the conservatism principle. However, no accounting procedure consistently applied can be conservative throughout the firm' life. We ask the following questions: (a) When is the expensing of Ramp;D conservative and when is it aggressive, relative to Ramp;D capitalization? and (b) What are the capital market implications of these reporting biases? To address these questions we construct a model of profitability biases (differences between reported profitability under Ramp;D expensing and capitalization) and show that the key drivers of the reporting biases are the differences between Ramp;D growth and earnings growth (momentum), and between Ramp;D growth and return on equity (ROE). Companies with a high Ramp;D growth rate relative to their profitability (typically early cycle companies) report conservatively, while firms with a low Ramp;D growth rate (mature companies) tend to report aggressively under current GAAP. Our empirical analysis, covering the period 1972-2003, generally supports the analytical predictions.In the valuation analysis we find evidence consistent with investor fixation on the reported profitability measures: we detect undervaluation of conservatively reporting firms and overvaluation of aggressively reporting firms. These misvaluations appear to be corrected when the reporting biases reverse from conservative to aggressive and vice versa
Year of publication: |
[2008]
|
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Authors: | Lev, Baruch |
Other Persons: | Sarath, Bharat (contributor) ; Sougiannis, Theodore (contributor) |
Publisher: |
[2008]: [S.l.] : SSRN |
Saved in:
freely available
Extent: | 1 Online-Ressource (60 p) |
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Series: | NYU Working Paper ; No. BARUCH LEV-10 |
Type of publication: | Book / Working Paper |
Notes: | Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments June 2004 erstellt |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10012770015
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