R&D Accounting Choice and Firm Performance: Evidence on Chinese Listed Firms

R&D accounting choice reveals managers’ private information about internal R&D progress and hence has implications about firm future performance. However, managers may use R&D capitalization to smooth earnings, which weakens the informativeness of the reported R&D expenditure about future firm performance. In this paper, we investigate the information content of R&D accounting choice about future performance of Chinese listed firms. Our empirical results show that Chinese firms that capitalize R&D tend to have lower profitability in the subsequent three years. Consistent with earnings management motivation, firms with low-reliability R&D capitalization tend to have significantly lower profitability in subsequent years than firms with normal capitalization. The findings continue to hold after we apply the Heckman two-stage model and the propensity score matching method and use alternative profitability measures. This paper provides new evidence on the implications of R&D accounting choice on future firm performance and shed new lights on accounting practice of Chinese listed firms.