Turning Losses into Assets? : R&D Capitalization in Relation to Negative Book Value of Equity

This study investigates the relationship between negative Book Value of Equity (BVE) andR&D capitalization, by examining private and public Swedish limited companies within theindustry of Data, IT and Telecommunication. The data set consists of 1,150 companies whoreported R&D capitalization in their annual reports from December 31, 2023, of which 541had a negative BVE before R&D capitalization. The study conducted a multiple linearregression model to examine how much R&D expenditures companies capitalize in relation tothe amount required to capitalize to avoid reporting a negative BVE. The empirical findingsindicate that a significant number of companies in the data set capitalize the amount of R&Dexpenditures required to avoid reporting a negative BVE in their financial statements,supporting the argument for earnings management influencing the decision regarding how toaccount for R&D. These findings contribute to the understanding about how companies mayengage in earnings management through their R&D capitalization decision to avoid reportinga negative BVE. The results also indicate that the goal of relevant and faithful representationwithin financial reporting, is lacking to some extent. The findings are particularly importantfor stakeholders to be aware of, who rely on financial statements in decision-making.