Development Costs Capitalization and Debt Financing
Journal of Business Finance & Accounting, 2019, 46 (5-6), 636-685 (DOI: 10.1111/jbfa.12370)/
Posted: 17 Nov 2018 Last revised: 2 Jun 2023
Date Written: January 11, 2019
Abstract
This study investigates debt market effects of research and development (R&D) costs capitalization, using a global sample of public bonds and private syndicated loans issued by public non-financial firms. Firstly, we show that firms capitalize larger amounts of R&D in a year when they exhibit a propensity for issuing bonds, rather than borrowing funds privately from the syndicated loan market, in the subsequent year. Secondly, we provide evidence that capitalized R&D investments reduce the cost of debt. We infer that debt market participants are able to identify firms’ motives for R&D capitalization, as we find a reduction in the cost of debt only for those firms that do not show indications of employing R&D capitalization for earnings management reasons. Indeed, only for this sub-sample of firms, the amount of capitalized R&D contributes positively to future earnings. We confirm that R&D capitalization is positively associated with audit fees and thus can be deemed to be a signaling device. Lastly, we find that it is the amount of R&D a firm is expected to capitalize and not the discretionary counterparts, which facilitates a firm’s access to public debt markets, reduces bond and syndicated loan prices, and contributes to future benefits.
Keywords: Research and development, R&D, IFRS, Debt financing, Cost of debt
JEL Classification: G12, G14, M40, M41
Suggested Citation: Suggested Citation