||Major Customers and Capitalization of R&D
||Department of Accountancy
This study aims to analyze the determinants and consequences of R&D capitalization in customer-supplier relationships. The first three research questions are how suppliers decide to capitalize software development costs when they face a more concentrated customer base, and whether the relationship will be affected by information asymmetry, or relationship-specific investments from its customers. Furthermore, I examine the effect of firms’ R&D capitalization on customer-supplier relationships from two perspectives: trade credit and relationship continuity.
Using a sample of U.S. software firms from 2001 to 2012, I document a negative relationship between a firm’s customer-base concentration and R&D capitalization. This finding is consistent with the view that supplier firms are induced to adopt a more conservative R&D accounting policy when their customers have a bargaining advantage over them. In addition, I find that the level of information asymmetry and the intensity of R&D investments by customers are positively related to the magnitude of R&D capitalization, suggesting that firms are more likely to capitalize R&D expenditures to convey favorable prospects when they operate in an opaque information environment and when their customers invest more in relationship-specific assets. Consequently, due to R&D capitalization signaling customers are more willing to accept a shortening of credit terms and to continue the business relationship.
Table of Contents iv
List of Tables vi
1. Introduction 1
2. Literature Review and Hypotheses Development 11
2.1. Introduction of R&D Accounting Treatment 11
2.2. The Signaling Role of R&D Capitalization 12
2.3. The Opportunistic Role of R&D Capitalization 14
2.4. The Characteristics of Software Systems Development 15
2.4.1. Uncertainties in Systems Development 15
2.4.2. Relationship-Specific Investments in Systems Development 16
2.5. R&D Activities in the Supply Chain Setting 17
2.6. Stakeholders’ Bargaining Power and Accounting Practices 18
2.7. The Determinants of R&D Capitalization in the Customer-Supplier Relationship 20
2.7.1. Stakeholders’ Bargaining Power and R&D Capitalization Decisions 20
2.7.2. Information Asymmetry among Stakeholders and R&D Capitalization Decisions 23
2.7.3. Stakeholders’ Relationship-specific Investments and R&D Capitalization Decisions 24
2.8. The Consequence of R&D Capitalization in the Customer-Supplier Relationship 27
2.8.1. R&D Capitalization and Trade Credit Extending to Customers 28
2.8.2. R&D Capitalization and the Duration of Customer-Supplier Relationship 30
3. Research Design 32
3.1. Regression Models and Variables Definitions 32
3.1.1. Test the Determinants of R&D Capitalization in the Customer-Supplier Relationship (H1-H3) 32
3.1.2. Test the Relationship between R&D Capitalization and Extending Trade Credit to Customers (H4) 36
3.1.3. Test the Relationship between R&D Capitalization and the Duration of Customer-Supplier Relationships (H5) 38
3.2. Data and Sample Selection 43
4. Empirical Results 45
4.1. Descriptive statistics 45
4.2. The Effect of Customers’ Bargaining Power, Information Asymmetry and Relationship-specific Investments on R&D Capitalization 53
4.3. The Effect of R&D Capitalization on Trade Credit 58
4.4. The Effect of R&D Capitalization on the Duration of Relationships 60
4.5. Additional Tests 64
4.5.1. The determinants of R&D capitalization: analysis using relationship-year observations 64
4.5.2. Decomposition of R&D Capitalization 69
4.5.3. Tests for Alternative Measures 74
5. Conclusion 79
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