The value-relevance of R&D capitalization: evidence from the GEM board in China

The new accounting standards adopted in China in 2007 allow conditional capitalization of R&D expenditure. An investigation of the capital market reaction of R&D expenditure becomes an important issue. This paper investigates the value-relevance of R&D capitalization with a new classification method. By using the Chinese GEM (Growth Enterprise Market) board listed companies which have disclosed R&D information during 2009~2012 as the sample, we first construct a model to divide the R&D capitalization into normal R&D capitalization and discretionary R&D capitalization. Then, we investigate the value-relevance of the two parts separately with Ohlson (1995) price model and return model. We find that normal R&D capitalization is positively related to firm value, while the relation between the discretionary R&D capitalization and the firm value is negatively significant (price model) or insignificant (return model). The findings indicate that it is important to identify the incentives for managers to capitalize R&D expenditure, and that the market could react rationally to R&D capitalization to a certain extent.