Accounting, Intangible Assets, Stock Market Activity, and Measurement and Disclosure Policy—Views From the U.K.

Abstract

This paper considers the impact of U.K. practices with respect to the measurement and disclosure of intangible assets, focusing on R&D activities. We first update prior U.K. work relating R&D activities to market prices. Second, given the clearly identified role of disclosure outside of the financial statements in helping market participants value R&D expenditures, we consider whether market forces are generally sufficient to ensure adequate disclosures with respect to intangibles by considering the cases of two biotechnology firms involved in the issuance of misleading disclosures. Within this context, we consider how disclosure regulation and enforcement mechanisms have evolved in recent years, and how this evolution has likely been affected by our ‘scandal’ cases. Our conclusions are that the case of the U.K. does not give rise to any wide‐scale concerns about the economic ill‐effects caused by the current state of recognition and disclosure with respect to expenditures on intangibles. Further, market forces are unlikely to be sufficient in ensuring honest and timely disclosures with respect to intangibles, but the combination of official regulation and voluntary self‐regulation appears to have stemmed the tide of any such disclosure scandals in the U.K.

Whom are you promoting? Positive voluntary public disclosures and executive turnover

“…Taken together, these results strongly support Hypothesis 3b. Overall, the results provide strong support for our prediction that the effects of total early‐stage R&D disclosures and alliance‐related early‐stage disclosures on executive departures are especially strong for those executives who work for high performing firms and thus are less likely overall to leave their jobs (Dedman and Lennox, ; Dedman et al , ).…”

“…As mentioned above, prior research reports a negative relationship between firm performance and voluntary executive turnover (Dedman and Lennox, ; Dedman et al , ). Because some firms in our sample are in the emerging growth phase and have not yet posted positive operating profits, we include both net Sales , in billions of dollars, and Sales Growth as indicators of performance.…”

Discussion of Dedman, Mouselli, Shen and Stark

“…The Dedman et al (2009) paper (DMSS) is difficult to comment on, as it is an extension of prior work that has already been published in good journals. Quibbling over minor technical details does not seem a worthy pursuit.…”

Accounting for Intangibles: Can Capitalization of R&D Improve Investment Efficiency?

“…Dedman et al . () interpret the IASB’s decision as in line with their UK evidence: although R&D capitalization and disclosures may sometimes be misleading, such an accounting rule paired with disclosures outside of the financial statements, the regulatory system in place, and market forces is working quite effectively.…”