The determinants and value relevance of the choice of accounting for research and development expenditures in the United Kingdom

My dissertation investigates the determinants and value relevance implications of the accounting method choice for certain development expenditures for firms with research and development (R&D) programs in the United Kingdom (U.K.). Evidence on these issues adds to several recent studies using U.S. data that document increases in the value relevance of financial information from implementing various hypothetical capitalization and amortization rules. My study contributes to this line of inquiry by examining the actual capitalization, amortization and expense policies chosen by firms in the U.K., where generally accepted accounting principles (i.e., SSAP No. 13) permit the choice of capitalization versus expensing of qualifying development expenditures.;Using a sample of 1,780 U.K. firm-year observations over 1993--1997, I find that the decision to expense versus capitalize qualifying development expenditures is influenced by the size of the firm (smaller firms are more likely to capitalize), the level of R&D intensity (firms with higher R&D intensity are more likely to capitalize), and whether the firm is in a steady-state with respect to its R&D programs (firms not in steady-state are more likely to capitalize). Comparisons of the value relevance of reported earnings and book values of equity versus adjusted values of these variables (where the adjustments restate the reported financial information to the alternative accounting method) indicate that firms who expense their qualifying development expenditures have little, if anything, to gain from adjusting their reported numbers to reflect as-if-capitalized numbers. For firms who capitalize their qualifying development expenditures, the value relevance of as-if-expensed earnings and book value of equity is at least as high as the value relevance of reported financial information. Finally, there is limited evidence that the steady-state status and R&D intensity of firms' R&D programs marginally influence the value relevance of firms' earnings and book value of equity conditional on the choice of accounting method for qualifying development expenditures.