Are tax incentives determinant and relevant for capitalizing R&D expenditures? Evidence from Europe

Giuseppe Di Martino, Grazia Dicuonzo, Arcangelo Vitelli and Vittorio Dell?Atti

FINANCIAL REPORTING, 2020, vol. 2020/2, issue 2, 63-97

Abstract: Using a sample of European listed companies between 2014 and 2017, we ex-a?mine accounting factors that lead management to capitalize R&D costs, with a specific focus on the tax incentives in the form of government grants. In our analysis, we distinguish between companies which capitalize R&D costs ("capitalizers") and companies which expense R&D costs ("expensers"). The evidence shows that the choice to capitalize R&D costs is positively related to the recognition of grants as revenue. We also investigate the value relevance of tax incentives related to R&D expenditures. Our empirical findings show that investors draw a distinction between government grants associated with research costs (EXP) and those asso-ciated with development costs (CAP). This paper presents both theoretical and practical implications. It contributes to the current debate on expensing or capital-izing R&D costs through a study of tax incentives received by companies for their research activity. Moreover, it offers empirical evidence on the use of R&D cost capitalization for purposes of tax incentives, which can be utilized by standard set-ters to assess opportunistic behaviors adopted by companies.

JEL-codes: M41 M48 (search for similar items in EconPapers)
Date: 2020
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