Under U.S. GAAP, reported balance sheet and income statements are based on immediate expensing of R&D expenditures. We capitalize those expenditures and derive adjusted equity book values and earnings using simple amortization techniques (straight-line over assumed industry-specific useful lives). After confirming that such adjustments increase the association of book values/earnings with contemporaneous stock prices (and future earnings), we examine the relation between those adjustments and future returns. Despite the approximate nature of our adjustments, they predict stock price movements over the next 20 months. Apparently, capitalization and amortization of R&D provides information not fully reflected in stock prices.
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