The impact of SEC scrutiny on financial statement reporting of in-process research and development expense

Were In‐Process Research and Development Charges Too Aggressive?

“…Finally, we find that the proportion of acquisitions with high IPRD charges relative to targets' prior R&D significantly declines following the SEC's scrutiny of IPRD. Our final result extends Dowdell and Press' (2004) findings-that informal SEC pressure led to lower IPRD levels-since we provide evidence that it also led to more appropriate IPRD reporting.…”

“…In-process research and development (IPRD) is the value allocated to incomplete R&D projects in purchase acquisitions, which is charged to an expense by the acquirer as of the acquisition date. Our results contribute to the earnings management literature by extending the work of Dowdell and Press (2004), who examine the impact of SEC scrutiny on the magnitude of IPRD write-offs, but not their appropriateness.…”

“…Panel B of Table 1 presents the industry distribution of acquiring firms by 3-digit SIC and indicates that our sample includes firms from 22 different industries. Similar to the samples in Deng and Lev (1998) and Dowdell and Press (2004), SIC 737, Computer Programming and Processing, Prepackaged Software, and Systems Design comprises a large portion of our sample.…”

“…The number of observations is 144. in Deng and Lev (1998) for their 375 acquisitions from 1980 through 1996, as well as the median IPRDI of 0.42 in Dowdell and Press (2004) for their sample of 582 SIC 737 acquisitions from 1996 through 2001. The evidence that Dowdell and Press (2004) find implies that the large number of acquisitions in 1999 through 2003-occurring after the 1998 SEC scrutiny-result in a lower median IPRDI in our sample. We investigate this further in a subsequent section.…”

“…We specifically define the categories, consonant with, relatively high, and relatively low in a later section of the paper. LEXIS-NEXIS searches, we augment our Research Insight sample with firms reporting IPRD in their 1996 through 1998 Forms 10-K. We also include the IPRD acquisitions investigated in Dowdell and Press (2004). For each prospective sample firm, we review Forms 10-K of the acquiring firms to determine the amount of IPRD allocated to each acquisition, the name of the target, and whether the entire target firm was acquired.…”