The effect of legal origin on the value relevance of R&D – European evidence
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School of Business |
Master's thesis
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Date
2021
Department
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Mcode
Degree programme
Accounting
Language
en
Pages
72 + 5
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Abstract
Prior studies have found legal origins to have economic consequences, but no prior study has examined the effect of legal origin on the value relevance of R&D expenditure. The economic consequences of legal origins may make the financial environment less or more favorable for R&D activities of firms, thus impacting the value relevance of R&D expenditure. R&D expenditure has been found to be positively value relevant in the U.S. where US GAAP are the main accounting standards. However, prior research has failed to find unambiguous evidence on the positive value relevance of R&D expenditure in a European and IFRS setting. This study aims to fulfill these shortcomings of prior research and it has three objectives. First, the main objective of the study is to examine how the legal origin affects the value relevance of R&D expenditure. The study compares firms listed in Scandinavian and code law countries to firms listed in common law countries in a European setting. Similar to majority of previous value relevance studies, the study examines the association between R&D expenditures and the market value of equity using OLS regression models. Second, the study examines the overall value relevance of R&D expenditure in European and IFRS countries. Third, the study digs deeper into different industry sectors in order to find whether the impact of legal origin on the value relevance of R&D differs between industries. The study provides three main findings. First, as expected, the study finds a significant and positive association between R&D expenditure and market value of equity. Second, as expected, the study finds a slightly less positive value relevance of R&D expenditure for firms in code law and Scandinavian law countries compared to common law countries. Third, the study finds only some evidence on the differences between industries but fails to clearly explain these differences. The study manages to contribute to prior literature in three ways. First, it fills in the gap of prior literature that has failed to clearly show that R&D expenditure are significantly and positively value relevant also in Europe in addition to the U.S. Second, the study adds legal origins to the list of possible factors affecting the value relevance of R&D. Third, the study supports prior research that has, almost unanimously, found common law origin to be associated with more developed and efficient financial environment. Regardless of relatively significant empirical results, there are three main limitations to consider when making conclusions about the results. First, as in empirical studies in general, there are statistical limitations such as data accuracy, correlation and sensitivity issues. Second, as in all studies, the results are not completely generalizable to every circumstances. Third, as the institutional settings and legal origins are converging rapidly, the long period of time examined undermines the ability of the results to accurately capture the current state of the phenomenon.Description
Thesis advisor
Jarva, HenryKeywords
value relevance, R&D, legal origin, IFRS, Europe