Abstract
This study examines the correlation among R&D accounting treatment, R&D state and tax avoidance behavior, with a focus on biotech firms. Findings from the analysis show that most firms are unlikely to capitalize R&D in a steady state; however, in the case of biotech firms, this is not the case. This may be due to biotech firms’ accounting choice to capitalize R&D outlays based on a strong belief in future opportunities of commercial success. Moreover, the analysis of tax avoidance behavior finds that firms with low capitalization in an R&D steady state have a positive correlation with tax avoidance, whereas biotech firms do not. The results imply that biotech firms focus on sustainable commercial success unlike the general patterns of other industries.
Highlights
In 2018, the most popular stocks on the Korean stock market were biotech stocks
The descriptive statistics for those variables mean that 54% (3% of biotech firms) of the sample firms had below the median R&D capitalization and 67% (3% of biotech firms) of the sample firms are in mature stage with regards to R&D
R&D accounting treatment of biotech firms is a controversial issue. It is doubtful whether R&D capitalization, an excessively high portion of R&D spending, is reliable or appropriate, or opportunistic accounting by overly optimistic judgment
Summary
In 2018, the most popular stocks on the Korean stock market were biotech stocks. Eight out of ten of the fastest-growing stocks were biotech. Despite many biotech firms recording losses, their market value seems to continue to rise due to the anticipation of future firm value through the commercial success of research and development (hereafter, R&D). In biotech, where R&D spending is significantly higher than in other industries, it is deemed that R&D capitalization is maximized to boost corporate profit and value in the early stages, based on the optimistic expectations of success in R&D. R&D spending seems to be a key indicator of how innovative an industry is, and vital for a sustainable future Focusing on this trend, this study examines the correlation between the stage of the firm’s R&D program and the accounting treatment of R&D. Biotech firms are expected to show a different tendency as R&D spending is significantly higher than in other industries and it is considered more important, for sustainable commercial success.
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