Purpose This study aims to investigate whether the capitalization of development costs among Chinese listed firms reflects genuine research and development (R&D) progress or opportunistic earnings management by distinguishing between normal and opportunistic R&D capitalization. It further explores how different R&D accounting choices influence firm performance and shape investor perceptions. Design/methodology/approach We utilize detailed disclosures of capitalized and expensed R&D costs at the individual project level, as mandated by Chinese financial reporting standards, using data from the period 2007 to 2019. Findings Firms engaging in opportunistic capitalization exhibit significantly lower profitability compared to normal capitalizers. After excluding opportunistic capitalizers, we find that, compared with firms that expense all R&D costs, the normal capitalizers have more patent applications and grants, higher selling, general and administrative costs, lower operating revenue and lower accounting profitability. Moreover, cumulative abnormal stock returns are significantly higher for the capitalization firms than for expense-all firms, while no significant difference is observed between normal and opportunistic capitalizers. Value relevance tests further suggest that only normal capitalizers enhance the value relevance of earnings. Originality/value The findings reveal the importance of distinguishing the motives behind R&D capitalization and underscore the challenges investors face in discerning managerial intent. Moreover, this study contributes to the literature by offering new insights into the application and interpretation of R&D accounting choice in an emerging market setting.
MA et al. (Mon,) studied this question.