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

Abstract

Using a sample of European listed companies between 2014 and 2017, we ex-a¬mine accounting factors that lead management to capitalize R&D costs, with a specific 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 asso-ciated with development costs (CAP). This paper presents both theoretical and practical implications. It contributes to the current debate on expensing or capital-izing 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 set-ters to assess opportunistic behaviors adopted by companies.