The value relevance of R&amp;D across profit and loss firms

Franzen, Laurel; Radhakrishnan, Suresh

doi:10.1016/j.jaccpubpol.2008.11.006

Cited by 64 publications

(67 citation statements)

References 19 publications

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“…Thus, close to 15% (=[0.6402 − 0.5436]/0.64.02) of the loss firms in this group would not report losses if R&D were capitalized. Franzen et al (2007) investigate the impact of R&D on the models of financial distress and argue that, due to conservative accounting treatment, higher R&D spending increases the likelihood of misclassifying solvent 16 Jan and Ou (2012) examine loss firms that are also reporting negative book values and find that the market prices of many negative book-value firms are higher than those of positive book-value firms especially when negative book values are due to sustained R&D expenditures over time. While the economic fundamentals might be similar, it is necessary to make some adjustment in the valuation model, which is beyond the scope of the present paper.…”

Section: (Ii) Descriptive Statisticsmentioning

confidence: 99%

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What Explains the Valuation Difference between Intangible‐intensive Profit and Loss Firms?

Ciftci¹,

Darrough

2015

Business Fin & Account

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Prior research suggests that loss firms are valued based on their abandonment/adaptation option values, while profit firms are valued as going concerns. However, conservative accounting treatment of expensing of R&D leads many R&D‐intensive firms to report losses even though they are not in financial distress. In this paper we investigate the difference in valuation of profit and loss firms that invest in intangibles, either through internal development (R&D) or purchases. The accounting treatment for internally developed intangibles is conservative in that US GAAP requires immediate expensing. Yet, it allows recognition of purchased intangibles. We find that in valuation of firms with high recognized‐intangible assets, book value has more prominence in loss firms than profit firms, while that is not the case for firms with high R&D expenditures. This suggests that their abandonment/adaptation option explains the difference in valuation between profit and loss firms with high recognized‐intangibles, while conservative accounting explains the valuation difference between profit and loss firms with high R&D intensity. This result suggests that recognition of intangibles in financial statements might mitigate the conservative bias in accounting numbers.

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Section: (Ii) Descriptive Statisticsmentioning

confidence: 99%

“…Franzen and Radhakrishnan () document that the value relevance of R&D differs across profit and loss firms. In particular, they find the valuation multiplier on R&D expenditures is positive for loss firms but negative for profit firms.…”

mentioning

confidence: 99%

What Explains the Valuation Difference between Intangible‐intensive Profit and Loss Firms?

Ciftci¹,

Darrough

2015

Business Fin & Account

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“…We also note that judged purely on the values of R-squared, model 2 is superior to model 14 We presume that these higher values for ω are attributable to the inherent intertemporal smoothing with such data. 15 For example, Franzen and Radhakrishnan (2009) suggest that the degree of erosion attached to R&D expense may only be appropriate to profit-making firms. Stark (2008) 1.…”

Section: Notementioning

confidence: 99%

“…For example, Franzen and Radhakrishnan () suggest that the degree of erosion attached to R&D expense may only be appropriate to profit‐making firms. Stark () provides further evidence of the importance of attaching different weights to individual components of earnings such as R&D.…”

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confidence: 99%

Valuation Weights, Linear Dynamics and Accounting Conservatism: An Empirical Analysis

Ashton

Wang

2013

Business Fin & Account

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Residual income models provide an important theoretical link between equity valuation and financial statement variables. While various researchers have developed models of how accounting policy impacts on the structure of these models, empirical support for these models is at best weak and frequently contradictory. In this paper, we develop an analytical model, which identifies the dependency between valuation weights in residual income models and the associated structure of earnings information dynamics and accounting conservatism. In contrast to many earlier studies, we find strong evidence of conservatism in our reformulation of the linear dynamics. We proceed to test our predictions of the dependency of the weights on two measures of conservatism, the conventional measure of price‐to‐book ratio and the recent measure of a C‐Score index developed by Khan and Watts (2009) and find that the empirical results accord well with our theoretical predictions in the case of the former but not the latter measure.

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“…Prior research shows that the valuation of firms announcing losses and their returnsearnings relation is different than for profitable firms (Darrough & Ye, 2007;Franzen & Radhakrishnan, 2009;Hayn, 1995). Loss announcements generally lead to more investor disagreement about a firm's future prospects and its potential return to profitability.…”

Section: Introductionmentioning

confidence: 99%

Differential Volume and Price Reactions to Loss Announcements and the Association With Loss Reversals

Dorminey

Sivakumar

Vijayakumar

2016

Journal of Accounting, Auditing & Finance

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We examine differential volume-price reactions to loss announcements and their association with loss reversals. Our findings show that differential volume-price reactions are dissimilar between firms reporting profits and losses. In addition, the differential volume-price reactions surrounding loss announcements are useful in predicting loss reversals. When jointly considered, volume and price reactions provide unique information about future profitability for firms currently reporting losses. Overall, our results are consistent with losses generating more investor disagreements and more trading volume and show that a measure based on differential volume-price reactions to loss announcements is informative with regard to predicting subsequent loss reversals.

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The value relevance of R&D across profit and loss firms

Cited by 64 publications

References 19 publications

What Explains the Valuation Difference between Intangible‐intensive Profit and Loss Firms?

What Explains the Valuation Difference between Intangible‐intensive Profit and Loss Firms?

Valuation Weights, Linear Dynamics and Accounting Conservatism: An Empirical Analysis

Differential Volume and Price Reactions to Loss Announcements and the Association With Loss Reversals

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