Market Reactions to Revisions in Accounting Standards on Research and Development Expenditures

Abstract

This paper uses event study analysis to statistically verify the extent to which the publication of revisions to research and development (R&D) expenditure related accounting standards has a short-term effect on stock prices leading to abnormal returns over the periods immediately before and after the event. The results show that the 2008 publication of partial revisions to the R&D accounting standards, and a related newspaper article reporting the possibility of partial capitalization of R&D expenditures, gave a significant boost to share prices of firms listed on the Tokyo Stock Exchange. Further, the results indicate that Japanese investors do not consider it appropriate to expense R&D costs as they occur, and instead prefer such costs to be considered as assets. If one of the goals of an efficient accounting system is to allow investors to make more informed decisions, the results obtained here have many implications for future accounting standards pertaining to R&D expenditures.