Research and development investments, development costs capitalization, and credit ratings: Exploratory evidence from UK R&D-active private firms

Annika Brasch, Brigitte Eierle and Robin Jarvis

Journal of International Accounting, Auditing and Taxation, 2022, vol. 48, issue C

Abstract: This exploratory study investigates research and development (R&D), specifically the relationship between development costs capitalization and the credit ratings of R&D-active private companies. Results indicate that uncertainty surrounding R&D investment is a leading factor in the credit risk assessment of R&D-active private companies. Hence, R&D intensity is seen as negatively impacting credit ratings. Although credit rating assessors are generally more concerned about downside risks, they seem to take into account different degrees of uncertainty. Consequently, our findings reveal that capitalized development projects that signal likely future economic benefits lead to better creditworthiness. Moreover, we infer from our additional analyses that credit rating assessors do consider the reasons of R&D-active private companies for capitalizing development costs. This conclusion is derived from evidence that discretionary capitalization ratios employed in opportunistic earnings management do have a significantly negative association with credit ratings. Conversely, non-discretionary counterparts have a significantly positive effect.

Keywords: Private firms; Accounting policy choice; R&D investment; Development costs capitalization; Credit rating (search for similar items in EconPapers)
JEL-codes: D82 G24 G32 G33 M40 M41 O3 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jiaata:v:48:y:2022:i:c:s1061951822000404

DOI: 10.1016/j.intaccaudtax.2022.100485

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