Capitalization of R&D Expenses in Technology Companies: Communicating Value Creation Amid Accounting Constraints

Chenli Wang

doi:10.54097/ajdscc51

Authors

Chenli Wang

DOI:

https://doi.org/10.54097/ajdscc51

Keywords:

R&D capitalization, information asymmetry, investor communication, technology companies, accounting standards.

Abstract

The rapid evolution of artificial intelligence (AI) has driven exponential growth in the AI industry, yet persistent financial challenges arise from high R&D expenditures and profitability imbalances. Under strict accounting standards (e.g., U.S. GAAP requiring expensing and IFS allowing limited capitalization), how the value of R&D investments is conveyed through financial reports or other channels has drawn significant attention. The study's findings indicated that capitalization of research and development expenses does not significantly enhance the immediate market response of investors. Using textual analysis, event studies, and regression analysis, we find that R&D capitalization alone does not significantly enhance investor response. At the same time, comprehensive information disclosure positively impacts market reactions by reducing information asymmetry. Results highlight the critical role of voluntary disclosure in conveying R&D value when accounting treatments are constrained. The study recommended that regulatory authorities should develop detailed disclosure guidelines for research and development expenses and accounting standards to enhance transparency. It is further recommended that refining disclosure guidelines and improving investor communication strategies to align financial reporting with innovation value.

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