| Publisher | Pennsylvania State University | ||
|---|---|---|---|
| Format | 222.4KB PDF | Date added | 01 Jan 2003 |
| Topics | Finance, Accounting Applications | ||
| Downloads | 892 | ||
This paper assesses the value of the information contained in management's choice of the accounting treatment for software development costs (SDC). The assessment is made in the context of the initial public offerings (IPO) market and is based on the effect of the accounting choice on information asymmetry and hence IPO underpricing. By sharing information about the probability of recoverability of SDC and the amortization period, management that elects capitalization reduces information asymmetry and thus underpricing. The results, based on a sample of 258 IPOs in the software industry, are consistent with the hypothesis. The findings suggest that the option to capitalize, through its information impact, lowers the cost of capital.
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