JOURNAL OF Accounting Economids - RAW.pdf

JOURNALOF Accounting Economids ELSEVIER Journal of Accounting and Economics 21 (1996) 107-138 The capitalization, amortization, and value-relevance of RD Baruch Lev*, Theodore Sougiannis b Haas School of Business and Boalt School of Law, University of California, Berkeley, CA 94720, USA bDepartment of Accountancy, University of Illinois, Champaiffn, IL 61820, USA (Received March 1993; final version received April 1995) Abstract G A A P mandates the full expensing of R D in financial statements, presumably because of concerns with the reliability, objectivity, and value-relevance of R D capital- ization. To address these concerns, we estimate the R D capital of a large sample of public companies and find these estimates to be statistically reliable and economically meaningful. We then adjust the reported earnings and book values of sample firms for the R D capitalization and find that such adjustments are value-relevant to investors. Finally, we document a significant intertemporal association between firms R D capital and subsequent stock returns, suggesting either a systematic mispricing of the shares of RD-intensive companies, or a compensation for