Capitalizing Versus Expensing

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Capitalizing versus Expensing

The value relevance of research and development expenditures in the technology sector

Accounting, Auditing and Control

I. Table of contents

I Table of contents2



1.1Problem statement10
1.3Research approach11
1.4Research questions11

2Value relevance and the earnings-returns relation14
2.1Value relevance studies14
2.1.4International factors18
2.2Importance of the usefulness of earnings20
2.3Earnings-return relation: empirical research21

3Research and development expenditures24
3.1Conditional capitalization versus expense-only25
3.2Value relevance of R&D expenditures: empirical research25 3.2.1No distinction in accounting recognition method26
3.2.2Capitalized versus expensed R&D expenditures29
3.3The technology sector35

4Research design39
4.1.1Hypothesis 140
4.1.2Hypothesis 240
4.1.3Hypothesis 341
4.2.1Hypothesis 141
4.2.2Hypothesis 243
4.2.3Hypothesis 344
4.3Sample selection and data collection45

5Statistical results47
5.1Hypothesis 147
5.1.1Price model47
5.1.2Returns model47
5.1.3Price model48
5.1.4Returns model48
5.2Hypothesis 249
5.2.1Price model49
5.2.2Returns model50
5.3Hypothesis 351
5.3.3Price model: CAP group51
5.3.4Price model: EXP Group52
5.3.5Returns model: CAP group53
5.3.6Returns model: EXP group54
5.4Regression assumptions tests54

6.1.1Hypothesis 156
6.1.2Hypothesis 258
6.1.3Hypothesis 359



II. Preface

After some interesting lectures this year, it became clear to me that the global convergence of accounting standards is inevitable. Figurative, the world is getting smaller and smaller and thus both companies and users of financial statements demand comparable accounting standards. While working on our paper for the master seminar, a colleague student and I found out that there is still no uniform recognition method with respect to R&D expenditures. Interested by this issue we started working on our paper and found out that prior empirical research generally came to the same conclusion on which recognition method is the most useful for users of financial statements. This made me decide to continue on this subject for my master thesis and to perform my own research with respect to the usefulness of the recognition methods of R&D expenditures.

The result of my research is now lying in front of you in the form of my master thesis. Of course, although this is ultimately an individual performance, I had some good support on the way. First, I would like to thank my supervisor, drs. Bart Snel RC, for his time, reading my thesis, and providing me with critical feedback. Next, I would like to thank my soon to be colleagues at Grant Thornton B.V. in Alphen aan den Rijn for providing me with a good work environment and the supplies to write my thesis. I am looking forward to start the post initial master at the Erasmus School of Accounting and Assurance while working at your company. And finally, I would like to thank my family and friends for their support, advice, and fun during my full-time student career.

III. Abstract

During the last decade there has been a great convergence of global markets. Due to the great development of the digital infrastructure – in which the introduction of the internet plays a central role – we are able to communicate fast and easy with someone on the other side of the world. As Ang et al. (2008) state, due to this...
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