I investigate the impact of implementing SFAS No. 86, which provides an exception to the GAAP requirement of the immediate expensing of research and development (R&D), on information asymmetry. Using bid‐ask spread and share turnover as proxies for information asymmetry, I find that after the introduction of SFAS No. 86, information asymmetry decreases for software firms relative to that of other high‐tech firms. Within the software industry, I find that information asymmetry is significantly lower for firms that capitalize (capitalizers) than for those who expense (expensers) software development costs. Thus, accounting for software development costs per SFAS No. 86 reduces information asymmetry and, consequently, the cost of capital. As well, investors' uncertainty about the future benefits of software development costs is reduced when firms capitalize these costs.
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1 October 2005
Research Article|
October 01 2005
Accounting for Software Development Costs and Information Asymmetry
Emad Mohd
Emad Mohd
McMaster University.
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Online ISSN: 1558-7967
Print ISSN: 0001-4826
American Accounting Association
2005
The Accounting Review (2005) 80 (4): 1211–1231.
Citation
Emad Mohd; Accounting for Software Development Costs and Information Asymmetry. The Accounting Review 1 October 2005; 80 (4): 1211–1231. https://doi.org/10.2308/accr.2005.80.4.1211
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