Development costs capitalization and debt financing

Abstract

This study investigates debt market effects of research and development (R&D) costs capitalization, using a global sample of public bonds and private syndicated loans issued by public non-financial firms. Firstly, we show that firms capitalize larger amounts of R&D in a year when they exhibit a propensity for issuing bonds, rather than borrowing funds privately from the syndicated loan market, in the subsequent year. Secondly, we provide evidence that capitalized R&D investments reduce the cost of debt. We infer that debt market participants are able to identify firms' motives for R&D capitalization, as we find a reduction in the cost of debt only for those firms that do not show indications of employing R&D capitalization for earnings management reasons. Indeed, only for this sub-sample of firms, the amount of capitalized R&D contributes positively to future earnings. We confirm that R&D capitalization is positively associated with audit fees and thus can be deemed to be a signaling device.Lastly, we find that it is the amount of R&D a firm is expected to capitalize and not the discretionary counterparts, which facilitates a firm's access to public debt markets, reduces bond and syndicated loan prices, and contributes to future benefits.

Country-level corruption and accounting choice: Research & development capitalization under IFRS

“…24 Similar conclusions can be inferred when using the coefficient of capitalized R&D (RDCap, Model 1, Table 8) in Kreß et al, (2019).…”

“…We focus on the capitalization of development costs, an important IFRS-specific accounting treatment, which is at the heart of the accounting choice literature (Kreß, Eierle, and Tsalavoutas, 2019). We also draw on business and management literature and conjecture that in countries with high levels of corruption, managers can exploit the features of such an environment and capitalize development costs which ordinarily should have been expensed (Hypothesis 1).…”

“…Under such condition, institutional corruption prevails and this subverts norms of expected sector standards and impairs the auditor's fiduciary duty as they become more captured by management (c.f., Levitt, 2000). This can be exacerbated especially if higher fees are paid as a result of capitalization (see the findings of Cheng et al, 2016 andKreß et al, 2019). This is why Youngdahl (2017, p. 279) argues that auditors '…have too often served as handmaidens of corruption'.…”

A double-edged sword: The effects of R&D intensity and capitalization on institutional investment in entrepreneurial firms

“…First, extant literature has paid little attention to the R&D overinvestment and its effect on entrepreneurial firms; we uncover that R&D overinvestment discourages future institutional investment. Second, in line with previous studies (Dinh et al, 2016;Kreß et al, 2019), we show that institutional investors consider the credibility of R&D capitalization. Third, by examining the effects on VCs and non-VCs, we confirm that VCs are less concerned about R&D overinvestment and suspicious capitalization as they can make a distinction.…”

“…On the one hand, managers may untruthfully capitalize more R&D costs to smoothen earnings (Markarian et al, 2008); beat earnings targets (Cazavan-Jeny et al, 2011;Dinh et al, 2016); or respond to financial distress (Jones, 2011). On the other hand, Kreß et al (2019) show that capitalized R&D significantly rose before debt financing. Together, driven by these motives to manipulate…”