Abstract:
We examine whether firms that capitalize a higher proportion of their underlying
intangible assets have higher analyst following, lower dispersion of analysts’
earnings forecasts and more accurate earnings forecasts relative to firms that
capitalize a lower proportion. Under Australian generally accepted accounting
principles, capitalization of intangible assets has become increasingly ‘routine’
since the late 1980s. It is predicted that this experience leads Australian analysts to
expect firms with relatively more certain intangible investments to signal this
fact by capitalizing intangible assets. Our results are consistent with this. We
find that capitalization of intangible assets is associated with higher analyst following
and lower absolute earnings forecast error for firms with a stock of
underlying intangible assets. Our tests suggest a weaker association between
capitalization and lower earnings forecast dispersion. We conclude that there
are benefits for analysts, for management to have the option to capitalize intangible
assets. These findings suggest that IAS 38
Intangible Assets
and AASB
138
Intangible Assets
reduce the usefulness of financial statements.
