International Journal of Business and Economics Volume 4, No. 2 August, 2005

A Model of R&D Capitalization

Gamal Atallah

Department of Economics, University of Ottawa, Canada and CIRANO

Massoud Khazabi

Department of Economics, University of Ottawa, Canada

Abstract

This paper studies the decision of firms to expense or capitalize R&D expenditures. The firm has an incentive to mismatch the benefits and costs of R&D, expensing a larger portion of R&D when the benefits occur in the long-run and capitalizing a larger portion when the benefits occur in the short-run. There is strategic substitutability between R&D investments and expensing. Accounting standards, market evaluation of capitalization, and firms’ accounting policies can have real effects on innovation.

Keywords：R&D, innovation, expensing, capitalization, accounting standards.

JEL Classifications：L21, M41, O32.

BACK