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Section 3450 of the Canadian Institute of Chartered Accountants (CICA) Handbook requires Canadian firms to capitalize development costs that meet certain criteria and to expense those that relate to research. International Accounting Standard (IAS) No. 38 favours a similar approach. In the United States, Statement of Financial Accounting Standard (SFAS) No. 2 recommends the immediate expensing of all research and development (R&D) spending. The only exception is SFAS No. 86, which requires software development costs to be capitalized when a product successfully passes a technological feasibility test. Consequently, the Canadian financial disclosure regime provides a rich setting for testing the market valuation of capitalized R&D. Our primary research question asks whether capitalized R&D provides useful information to market participants investing in Canadian firms. We use price‐level and return models to assess the value relevance of capitalized R&D disclosed in the financial statements under Canadian GAAP. In line with expectations, using a price‐level model, we find that capitalized R&D and R&D expense as disclosed in the financial statements provide information that is value relevant to market participants. However, we find that R&D capitalized during the year helps explain returns while R&D expense does not. Thus we conclude that the application of section 3450 of the CICA Handbook produces value‐relevant information.

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Purpose -The purpose of this paper is to examine the relationship between a firm's propensity to lease and several firm characteristics: tax position, financial constraint, ownership structure, growth, and size. Design/methodology/approach -Controlling for industry, total lease share, operating and capital lease share ratios, obtained using an income statement approach, are regressed on a trichotomous tax variable, a dichotomous cash flow coverage ratio variable, debt over fixed assets, ownership concentration, market to book value of shares and the natural log of sales. Findings -Total lease share increases with leverage, tax position and growth; it decreases with cash flow coverage, ownership concentration and firm size. Results for operating lease share are similar to those for total lease share. In contrast, capital lease share decreases with tax position and increases with ownership concentration and size.Research limitations/implications -The results suggest that leasing offers added debt capacity and increases in financially constrained firms. Firms that pay high taxes seem to place more value on the constant stream of tax deductions from the rental payments than on deductions from decreasing interest costs and amortization. Finally, highly concentrated Canadian firms may use less leasing because they are more family-controlled. Originality/value -The literature offers mixed reasons for firms' decisions to lease or purchase assets. This study provides further evidence in a rich setting. In 2001, the Canadian tax authorities changed the tax treatment of leases, thus providing an opportunity to validate prior results on the impact of taxes on leasing. By including two different measures of financial constraint, this study disentangles the substitution and the added debt capacity hypotheses.