Capitalization of R&D costs and earnings management: Evidence from Italian listed companies

Garen Markarian, Lorenzo Pozza and Annalisa Prencipe

The International Journal of Accounting, 2008, vol. 43, issue 3, 246-267

Abstract: The capitalization of research and development (R&D) costs is a controversial accounting issue because of the contention that such capitalization is motivated by incentives to manipulate earnings. Based on a sample of Italian listed companies, this study examines whether companies' decisions to capitalize R&D costs are affected by earnings-management motivations. Italy provides a natural context for testing our hypothesized relationships because Italian GAAP allows for the capitalization of R&D costs. Using a Tobit regression model to test our hypotheses, we show that companies tend to use cost capitalization for earnings-smoothing purposes. The hypothesis that firms capitalize R&D costs to reduce the risk of violating debt covenants is not supported.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:accoun:v:43:y:2008:i:3:p:246-267

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