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Signaling Future Performance Through Accounting Choice: The Case of R&D Accounting in France
Anne Cazavan - Jeny, Essec Business School
Thomas D. Jeanjean, HEC School of Management
Peter R. Joos, Baruch College
ABSTRACT. We examine whether managers signal private information about future performance of the firm through their decision to capitalize or expense R&D expenditures. Focusing on a French setting where managers can capitalize R&D expenditures under certain circumstances, we find that firms that capitalize R&D expenditures spend less on R&D, have more volatile R&D efforts, are smaller, and are poorer performers than firms that expense R&D expenditures. We also find that capitalizers capitalize R&D outlays when they need to meet or beat thresholds. Finally, we show that the decision to capitalize R&D is generally associated with a negative or neutral impact on future performance even after controlling for self-selection. Our findings suggest that management is unable or unwilling to signal future performance through its decision to capitalize R&D and therefore contrast with previous supportive evidence in favor of capitalization in the literature.
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