R&D capitalization vs. R&D expensing: A theoretical model with policy implications

Yongying Wang ()

Finance Research Letters, 2024, vol. 67, issue PB

Abstract: The aim of this study is to establish a theoretical model to investigate the incentives of firms for choosing R&D capitalization. We focus on a monopoly firm managed by a typically myopic manager. In a two-stage setting, the manager determines the level of R&D prior to its output decision. Our model indicates that capitalizing some R&D costs yields higher profitability than fully expensing such investments. Moreover, we show that a longer useful life of capitalized assets is favorable for both consumer surplus and social welfare; thus, policy-makers should encourage policies that support extended lifespans of these assets.

Keywords: Capitalization; Expensing; Investment; Monopoly; R&D (search for similar items in EconPapers)
JEL-codes: D25 D42 L12 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:67:y:2024:i:pb:s1544612324009504

DOI: 10.1016/j.frl.2024.105920

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