The effect of in-process research and development capitalization on M&A and purchase price allocations

We investigate whether the change in accounting treatment of in-process research and development cost (IPRD) from expensing to capitalization affects the frequency of acquiring target firms with IPRD and the purchase price allocated to IPRD. We examine 1490 acquisitions in high-technology industries using a unique data set of purchase price allocations. For our sample as a whole, we find that the accounting rule change does not reduce the number of acquisitions with IPRD or the purchase price allocated to IPRD, but our results vary by industry. We provide evidence that the frequency of acquisitions with IPRD decreased for two of the four industry groups and IPRD intensity (IPRD/Assets Acquired) decreased for two industry groups. Our study contributes to research that examines whether mandatory accounting changes affect company economic decisions and research on managing earnings using IPRD.