Topic: Do firms inappropriately capitalize development costs? Evidence from China

Speaker: Zheng Dengjin, Central University of Finance and Economics

Time: April 18, 2024, 10AM

Venue: EMS 319

Abstract: This study investigates whether firms inappropriately capitalize development costs. We argue that capitalization of development costs should be positively associated with R&D outputs, and absence of such association indicates inappropriate implementation of capitalization. Using data from listed firms in China over the period 2007‒2017, we fail to find evidence of inappropriate capitalization of development costs. Capitalization is, in general, positively associated with R&D outputs, and such association is stronger for State-owned Enterprises and qualified High- and New-technology Enterprises. This association can be strengthened by more restrictive scrutiny; however, it can also be weakened when firms are motivated to meet earnings targets and have higher agency costs and financial constraints. Furthermore, results suggest that capitalization of development costs is significantly and positively associated with current and future firm value, and the correlation is strengthening over time. This study adds to the literature by adopting direct R&D outputs to detect inappropriate capitalization of development cost, and by adding some Chinese evidence and sheds some light on the potential risks involved in the implicit R&D accounting policy choice.

Guest Bio: Zheng Dengjin is currently an associate professor and doctoral supervisor at the School of Accounting, Central University of Finance and Economics, and the deputy director of the Financial Management Department. He has been selected for the Ministry of Finance's High-level Financial and Accounting Talent Quality Improvement Project and the "Longma Scholars (Youth)" program at Central University of Finance and Economics. In terms of research, he has published over 40 papers in mainstream domestic and international journals such as JAPP, JCE, "Management World," and "Economics (Quarterly)," authored 2 academic monographs, and led 1 national-level project and 3 provincial and ministerial-level projects. In terms of teaching, he has published a financial management textbook, won the first prize in the 11th Beijing Higher Education Young Teachers' Basic Skills Competition, the second prize in the first and third Beijing Teaching Innovation Competitions, and over 10 provincial and ministerial-level awards including the Excellent Undergraduate Teaching Plan of Beijing Higher Education Institutions.