Does Financial Information Presentation Format Matter? Evidence from Research and Development Expenses Reporting

This paper investigates the real and capital market effects of a mandatory change in the presentation format of research and development (R&D) expenses. We utilize a natural experiment of China’s implementation of a new presentation format of corporate R&D expenses that requires Chinese public firms to present their R&D expenses on their income statements as a separate line item (income statement presentation), instead of as part of the general and administrative expenses supplemented by additional information in the notes to the financial statements (footnote presentation). We predict and find that firms report higher R&D expenses in the income statement presentation regime. We further find that firms’ innovation efficiency decreases, and the positive valuation implication of reported R&D expenses diminishes after the presentation format change. The evidence is consistent with firms’ increasing their reported R&D expenses by (re)classifying some general and administrative expenses to R&D expenses. These findings suggest that the R&D expense presentation format regulation, which aims to improve R&D information transparency, may have unintended consequences