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Working Paper

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US GAAP (SFAS 2) requires immediate expensing of research and development (R&D) expenditure. Critics of this rule contend that the current treatment incentivizes managers to cut essential investments in R&D to manage short-term profits, and such actions could lead to longer-term adverse consequences for firms and investors. While other observers argue that there is little rigorous research that suggests that the current accounting treatment has harmful consequences. In this study, we exploit a setting in Germany when the accounting rule for R&D reporting changed from immediate expensing (as in the U.S.) to partial capitalization when Germany adopted International Financial Reporting Standards (IFRS) in 2005. We analyze German public companies over the years 1997 to 2009, and employ an econometric technique called Stochastic Frontier Analysis (SFA) to generate estimates of firm-specific efficiency for each firm-year in our sample. An attractive feature of the German setting is that it enables a firm to act as its own control, and as a result, concerns regarding self selection and omitted firm attributes could largely be mitigated. We find that efficiency of German firms improved significantly in the post-IFRS adoption period relative to the pre period. We also run our tests on a control sample of German companies that have never reported R&D expense during our sample period and find no evidence of efficiency gain for this control group following the IFRS adoption. This analysis helps to closely tie the observed efficiency gain to the change in the R&D reporting rule. Finally, our results are robust to alternative model specifications, various alternative input and output measures for estimating efficiency, and a battery of sensitivity tests.


R&D expenditure, IFRS, Efficiency, Intangible benefits, Germany


Accounting | Corporate Finance

Research Areas

Corporate Reporting and Disclosure

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.