The value relevance of management’s research and development reporting choice: Evidence from Australia

Abstract

We examine the value relevance of Australian firms’ discretionary R&D accounting policy and the association between this expenditure and the firm’s future economic performance. The results indicate that: (1) managerial discretionary accounting practice, capitalizing or expensing R&D expenditure, demonstrates greater value relevance than accounting figures that are the product of mandatory R&D expensing, (2) managerial discretionary capitalized R&D accounting figures demonstrate higher association with market share prices than managerial discretionary expensed expenditure, (3) the strength of the association between R&D accounting figures and the firm’s market value is higher for firms that are members of a defined industrial group than for the general population of firms and (4) R&D capitalized expenditure is positively and significantly associated with the firm’s future earnings. We also examine the sensitivity of comparative value relevance models to the choice of deflator variables. Our results are robust with respect to such choice. Implications of our findings for accounting rule makers and researchers are also offered.