The Capitalization of Intangibles and Managerial Information

In this study, I investigate whether managers’ capitalization of intangible expenditures conveys incremental information, about the amount and timing of future cash flows, to expensed intangible expenditures. I find the association between capitalized SD (Software Development) expenditures and future cash flows is stronger than the association between reported RD indicating managers may use the capitalization decision to convey private information when incentives to do so are higher. However, I find the association is lower for firms whose capitalized SD expenditures allows them to meet or beat analysts’ forecasts, consistent with managers using the capitalization decision opportunistically. These findings suggest that on average managers who capitalize SD expenditures use their private information to convey the future cash flow implications of SD expenditures; but that in some situations they may also use the capitalization decision opportunistically.