Research and development reporting and stock performance: evidence from China

Abstract

Purpose China adopted its new Accounting Standards for Business Enterprises No. 6 in 2007, which substantially converges with the International Financial Reporting Standards. It stipulates that firms operating in China shall capitalize development costs provided specific criteria have been met. This paper aims to examine the effects of the new accounting policies of R&D on the value-relevance and stock performance of 36,299 Chinese firms-years from 2007 to 2020. Design/methodology/approach A comprehensive multi-stage analysis was conducted. Multiple linear regressions were performed on the pooled cross-sectional time-series total R&D, capitalized expenditures, expensed costs and other key financial factors to test for the effects of R&D on the stock prices, contemporaneous stock returns and subsequent stock returns for the full sample, capitalizer sample and expenser sample, respectively. Findings First, majority of Chinese firms (about 80% of those reported) elect to adopt expensing R&D approach, while about 20% deploys capitalization treatment. Second, key attributes such as size, profitability, leverage and R&D intensity are highly associated with capitalization propensity. Third, current capitalization affects the contemporaneous stock prices and stock returns (priced-in) with yearly volatility. Finally, intertemporal association exists between firms’ expensing costs and subsequent returns due to a delayed reaction. Originality/value As the world largest emerging economy, the results show that research and development information adds value, and capitalizers outperforms expensers in the area of stock performance. This strategy works irrespectively of economic development stage or capital market maturity. The findings call for more capitalization.

Measuring the Effect of Income Inequality, Financial Inclusion, Investment, and Unemployment, on Economic Growth in Africa: A Moderating Role of Digital Financial Technology

“…There is no inconsistency between Galor and Zeira (1993) theory and this narrative. Contrary to the conclusions of Bai et al (2023) found that income disparity is positively and in most cases strongly connected with economic growth. Using a more comprehensive data set on income inequality, Ali (2023) and Piao et al (2023) revaluated the association between income disparity and economic growth and found a robust positive correlation between an increase in income inequality and subsequent economic growth in the short and medium term.…”