US GAAP (SFAS 2) requires immediate expensing of research and development (R&D) expenditure. Critics of this rule contend that the current treatment incentivizes managers to cut essential investments in R&D to manage short-term profits, and such actions could lead to longer-term adverse consequences for firms and investors. While other observers argue that there is little rigorous research that suggests that the current accounting treatment has harmful consequences. In this study, we exploit a setting in Germany when the accounting rule for R&D reporting changed from immediate expensing (as in the U.S.) to partial capitalization when Germany adopted International Financial Reporting Standards (IFRS). We analyze German public companies over the years 1995 to 2009, and employ an econometric technique called Stochastic Frontier Analysis (SFA) to generate estimates of firm-specific efficiency for each firm-year in our sample. We find that efficiency of German firms improved significantly in the post-IFRS adoption period relative to the pre adoption period. Our results are robust to alternative model specifications, various alternative input and output measures for estimating efficiency, and a battery of sensitivity tests. Our evidence implies that the immediate R&D expensing rule (prior to IFRS adoption) may have resulted in poorer operating performance of German firms due to potential misallocation of resources.
| Speaker: | Dr Neil Bhattacharya Associate Professor, Ernst & Young Faculty Research Fellow, Southern Methodist University |
| When: |
3.30 pm - 5.00 pm |
| Venue: | School of Accountancy [Map] Level 4, Meeting Room 4.1 |
| Contact: | Office of the Dean Email: SOAR@smu.edu.sg |
