MTEI Seminar by Prof. Yuan Ding, China Europe International Business School (CEIBS)
Event details
| Date | 12.12.2013 |
| Hour | 12:00 › 13:30 |
| Speaker | Prof. Yuan Ding, China Europe International Business School (CEIBS) |
| Location | |
| Category | Conferences - Seminars |
"Making sense of financial information by sophisticated users: The case of R&D reporting"
Abstract
R&D capitalization is promoted by the international accounting standard-setter (the International Accounting Standards Board - IASB) as a way to help investors better understand the firm’s future cash flows, consistent with the IASB’s claim to favor investors’ information needs. However, the investors’ preference for relevance over reliability (and for decision usefulness over stewardship) is assumed more than actually known. In this paper, we investigate how financial analysts, theoretically the epitome of “rational and calculative agents”, make sense of the figures reported under a new standard. Analyzing the R&D accounting policy of major European carmaker Renault over ten years (from 2002 to 2011), we document that Renault modified its R&D accounting policy from total expensing to capitalization, consistent with IASB recommendations and investors’ increasing influence on the company. Based on a content analysis of analysts’ reactions to Renault’s accounting choices in conference call transcripts, together with extensive analysis of other documentation related to Renault (annual reports and presentations to analysts), we find that Renault’s decision was constantly challenged by analysts, and even on occasion considered suspicious. Our findings contradict the conventional wisdom that investors should prefer R&D capitalization, and underlines the mechanism through which investors “make sense” of the reported figures.
Keywords
Shareholder, accounting policy, R&D capitalization, IASB, Renault, sensemaking.
Abstract
R&D capitalization is promoted by the international accounting standard-setter (the International Accounting Standards Board - IASB) as a way to help investors better understand the firm’s future cash flows, consistent with the IASB’s claim to favor investors’ information needs. However, the investors’ preference for relevance over reliability (and for decision usefulness over stewardship) is assumed more than actually known. In this paper, we investigate how financial analysts, theoretically the epitome of “rational and calculative agents”, make sense of the figures reported under a new standard. Analyzing the R&D accounting policy of major European carmaker Renault over ten years (from 2002 to 2011), we document that Renault modified its R&D accounting policy from total expensing to capitalization, consistent with IASB recommendations and investors’ increasing influence on the company. Based on a content analysis of analysts’ reactions to Renault’s accounting choices in conference call transcripts, together with extensive analysis of other documentation related to Renault (annual reports and presentations to analysts), we find that Renault’s decision was constantly challenged by analysts, and even on occasion considered suspicious. Our findings contradict the conventional wisdom that investors should prefer R&D capitalization, and underlines the mechanism through which investors “make sense” of the reported figures.
Keywords
Shareholder, accounting policy, R&D capitalization, IASB, Renault, sensemaking.
Practical information
- General public
- Free