This paper investigates the real and capital market effects of a mandatory change in the presentation format of research and development (R&D) expense. We utilize a natural experiment of China’s implementation of a new presentation format of corporate R&D expense that requires Chinese public firms to present their R&D expense on their income statements as a separate line item (income statement presentation), instead of as part of the general and administrative expenses supplemented by additional information in the notes to the financial statements (footnote presentation). We predict and find that firms report higher R&D expense in the income statement presentation regime. We further find that firms’ innovation efficiency decreases, and the positive valuation implication of reported R&D expense diminishes after the presentation format change. The evidence is consistent with firms’ increasing their reported R&D expense by (re)classifying some general and administrative expenses to R&D expense. These findings suggest that the R&D expense presentation format regulation, which aims to improve R&D information transparency, may have unintended consequences.
| Speaker: | Dr Baohua Xin Associate Professor of Accounting, University of Toronto |
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