An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Dan Givoly
Smeal College of Business Penn State University

Charles Shi
University Of California - Irvine

Abstract: The paper assesses the value of the information contained in management’s determination of the accounting treatment for software development costs. The assessment is made in the context of the initial public offerings (IPO) market and is based on the effect of the accounting treatment on information asymmetry and hence IPO underpricing. We hypothesize that by sharing information about the probability of recoverability of software development costs and the amortization period, management that elects capitalization reduces information asymmetry and thus underpricing. The results, based on a sample of 392 IPOs in the software industry, are consistent with the hypothesis. The findings suggest that the option to capitalize, through its information impact, lowers the cost of capital.

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