The Effects of Accounting Enforcement on the Informativeness of Capitalised R&D Across IFRS Countries

ABSTRACT

We examine the effect of country‐level accounting enforcement on the informativeness of capitalised R&D across 19 countries that adopted IFRS by 2005. We find that capitalised R&D has a marginally stronger positive association with future earnings in strong‐enforcement countries compared to weak‐enforcement countries, consistent with higher financial reporting quality for R&D in more rigorous enforcement environments. We also find that the association between capitalised R&D and market value is weaker in countries with stronger enforcement. This finding is consistent with stronger enforcement environments providing enhanced narrative disclosures that may convey some of the R&D‐related information directly to investors, thereby reducing the incremental valuation role of the capitalised R&D.