We examine whether the accounting treatment of R&D is a credible signal for the firm’s future performance, both operating and financial. We examine Greek-listed firms that report under IFRS. IAS 38 imposes capitalization of R&D projects that are expected to be successful. We provide evidence that firms classified as capitalizers are larger, more leveraged and less profitable than those that expense R&D. We find that capitalizers capitalize when they want to beat last year’s income benchmark. We show that capitalization is negatively or neutrally associated with future performance. In addition to that, we show that when firms capitalize and expense R&D at the same time, the expensed part of R&D costs is positively associated with future performance. Although we cannot explicitly prove that managers capitalize to manage earnings, the findings suggest that capitalization is not a credible signal for future superior firm performance. Our findings are in contrast with past literature supporting that R&D capitalization is an indication of better future performance.
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