Following the thematic inspections conducted by the Financial Supervisory Service in 2017 and 2018, there has been increasing interest in the capitalization of R&D expenditures. Companies can record R&D spending as intangible assets, thereby inflating...
Following the thematic inspections conducted by the Financial Supervisory Service in 2017 and 2018, there has been increasing interest in the capitalization of R&D expenditures. Companies can record R&D spending as intangible assets, thereby inflating assets on the balance sheet and relatively reducing the debt ratio. Additionally, by not expensing R&D costs in the current year, operating profits for that year appear higher. If the capitalization of R&D expenditures aligns with the original purpose of K-IFRS, it can serve as an indicator reflecting the company's technological capabilities and growth potential. However, there is a risk that management might excessively capitalize R&D expenditures to overstate the company's financial health, contrary to the intent of K-IFRS. This temptation might be particularly appealing for smaller companies. From this perspective, this study examines the relationship between R&D capitalization ratio and long-term financial performance of small and medium-sized enterprises (SMEs) in South Korea. Furthermore, it identifies a moderating variable that may influence this relationship. Specifically, building on previous research suggesting that discretionary R&D capitalization can be monitored and controlled through good corporate governance, this study hypothesizes that foreign ownership positively moderates the relationship between R&D capitalization ratio and financial performance. In summary, excessive R&D capitalization in SMEs may deteriorate their long-term financial performance; however, this effect can be mitigated in the presence of high foreign ownership, which indicates superior governance structures. To test this hypothesis, the study collected 3,060 observations from 687 listed companies in South Korea from 2011 to 2017. Empirical analysis revealed that higher R&D capitalization ratios in SMEs are associated with decreased long-term financial performance, and this relationship is less pronounced with higher foreign ownership. Based on these results, the study offers various theoretical and practical implications.