An Evaluation of the Causes and Consequences of In-Process Research and Development Restatements*

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 (IPRamp;D) write-offs taken during 1997 and 1998. Using hand collected data, I examine the characteristics of firms choosing to overstate IPRamp;D and the market's reaction to the restatement events. I discuss the motivations for overstating IPRamp;D and find evidence of the association between firms using aggressive IPRamp;D allocations and relatively poor future performance. I use a partial observability probit model and find that firms with limited operating prospects which acquired firms with greater intangible premiums were more likely to overstate IPRamp;D. Finally, using methods to control for the contemporaneous correlation among the restatement announcements, I find that the market reaction to most IPRamp;D restating events is weak. Few firms report large negative price consequences to an IPRamp;D restatement; thus, investors are, for the most part, not misled by aggressive IPRamp;D practices as claimed by the SEC