The impact of accounting for research and development on innovation

This paper examines whether a change in the accounting rule for research and development (R&D) cost is associated with changes in the innovation process. Specifically, I examine whether R&D expenditure, the number of patents per R&D dollar, and the number of citations per R&D dollar differ for firms that capitalize their R&D (capitalizers) relative to those that expense their R&D (expensers) after the issuance of Statement of Financial Accounting Standard (SFAS) 86, Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed. I find that relative to expensers, capitalizers increase their R&D expenditure post-SFAS 86. In addition, I find that the quality of innovation declines: post- SFAS 86, the total number of patent citations per R&D dollar decreases more for capitalizers than it does for expensers. This decline is consistent with managers of capitalizing firms taking advantage of SFAS 86 by over-investing in poor quality projects. Overall, the paper provides evidence that financial reporting can impact investments in innovation.

Department dc:contributor.department

Sloan School of Management.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2012

Author dc:creator

• Li, Lei (Lynn Lei)

Advisor dc:contributor.advisor

• John Core and Joseph Weber.

• Sloan School of Management.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/77822

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/77822