An examination of the restatements of in-process research and development

Abstract

This paper uses several approaches to assess the impact of the Security and Exchange Commission's (SEC) scrutiny of firms' purchase accounting and in-process research and development write-offs during 1997 and 1998. Using hand collected data, I examine the characteristics of firms choosing to overstate IPR&D and the market's reaction to the restatement announcements. I discuss the motivations for overstating IPR&D and find evidence consistent with firms using IPR&D write-offs to improve future earnings. I use a partial observability probit model and determine that IPR&D overstatements are related to the market's expectations for the firm's future performance and the materiality of the intangible premium. Finally, using methods to control for the contemporaneous correlation among the restatement announcements, I find that the market reaction to most IPR&D restating events is weak. Few firms reported large negative price reactions to IPR&D restatement events, thus, investors were, for the most part, not mislead by the IPR&D overstatements as claimed by the SEC.