The Effects of In－process R&D Information on Value Relevance of Capitalized R&D in Bio－Pharmaceutical Industries
Asian Tax Journal Vol. 23 No. 5 (2022), pp. 139-160
Abstract
In response to the controversy that Bio－pharmaceutical firms have capitalized R&D expenditures excessively, the supervisory authorities have conducted the thematic review, and expanded both R&D capitalization footnotes in audit reports and R&D disclosures of annual reports as a way to inform information users of the risks of the industry. Prior studies have reported the decreased R&D capitalization ratio and the enhanced value relevance of capitalized R&D after the thematic review, but it is difficult to find a study examining the usefulness of new R&D－related disclosures. As the expansion of disclosure increases the burden on companies, it is important to determine the appropriateness of the current disclosure policy by ensuring that the information is actually used. Therefore, this study tried to verify the usefulness of in－process R&D information by investigating whether the newly disclosed development stage information after 2017 affects the increased value relevance of capitalized R&D revealed in previous research. As a result of analysis with 618 Bio－pharmaceutical listed firm－year from 2017 to 2020, capitalized R&Ds have contributed to firm value on average, but the existence of unfinished R&D has decreased value relevance. The results are maintained even in the sub－samples, firms with capitalized R&D and companies with that year capitalized R&D. This shows the usefulness of the development stage, a new disclosure information, and suggests that the disclosure expansion is actually helping information users. This study is significant in that it expands previous studies by demonstrating the usefulness of new disclosure information and supports the validity of the supervisory authority’s expansion of R&D disclosure. It also suggest that transparent disclosure of R&D activities can be a means of restoring investor confidence, and that various characteristics such as R&D success experience (the existence of development costs) need to be controlled for R&D research.
Keywords
- In－process R&D Information
- Bio－pharmaceutical
- R&D expenditures
- Value－relevance
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