Under U.S. GAAP, reported balance sheet and income statements are based on immediate expensing of R&D expenditures. We capitalize those expenditures and derive adjusted equity book values and earnings using simple amortization techniques (straight-line over assumed industry-specific useful lives). After confirming that such adjustments increase the association of book values/earnings with contemporaneous stock prices (and future earnings), we examine the relation between those adjustments and future returns. Despite the approximate nature of our adjustments, they predict stock price movements over the next 20 months. Apparently, capitalization and amortization of R&D provides information not fully reflected in stock prices.
Attached is a preprint version of this chapter. For the published version, please see the Ashgate Web site.
Lev, Baruch, Doron Nissim, and Jacob Thomas. "On the Informational Usefulness of R&D Capitalization and Amortization." In Visualising Intangibles: Measuring and Reporting in the Knowledge Economy, 97-128. Ed. Stefano Zambon and Giuseppe Marzo. Burlinton, VT: Ashgate Publishing, 2008.
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