R&D Disclosures and Capitalization under IAS 38-Evidence on the Interplay between National Institutional Regulations and IFRS Adoption

Based on the notion that the effects of IFRS adoption are dependent on changes in the institutional environment, this paper analyzes the effects of one prominent feature of IFRS: the accounting for research and development (R&D) under IAS 38. In our setting, IFRS adoption is accompanied by a change in the national institutional environment of R&D disclosure in the management commentary. National disclosure regulations can make R&D capitalization more informative when investors are skeptical of capitalization due to reliability concerns. We find that firms with higher levels of R&D disclosures that are not suspect of earnings management generally have lower cost of capital and higher market values. Their cost of capital increase and market values decrease with higher R&D capitalization, indicating that capitalization introduces information uncertainty that cannot be resolved by better disclosure. The findings imply that the institutional effect of disclosure has a strong influence on IFRS informativeness.