Are tax incentives determinant and relevant for capitalizing R&D expenditures? Evidence from Europe

Using a sample of European listed companies between 2014 and 2017, we exa- mine accounting factors that lead management to capitalize R&D costs, with a spe- cific focus on the tax incentives in the form of government grants. In our analysis, we distinguish between companies which capitalize R&D costs (“capitalizers”) and companies which expense R&D costs (“expensers”). The evidence shows that the choice to capitalize R&D costs is positively related to the recognition of grants as revenue. We also investigate the value relevance of tax incentives related to R&D expenditures. Our empirical findings show that investors draw a distinction between government grants associated with research costs (EXP) and those associated with development costs (CAP). This paper presents both theoretical and practical impli- cations. It contributes to the current debate on expensing or capitalizing R&D costs through a study of tax incentives received by companies for their research activity. Moreover, it offers empirical evidence on the use of R&D cost capitalization for purposes of tax incentives, which can be utilized by standard setters to assess oppor- tunistic behaviors adopted by companies.

Keywords: accounting choices, government grants, R&D expenditures, tax incen- tives, value relevance.