Analyst Coverage and the Market Valuation of Capitalized versus Expensed R&D*

We investigate the information benefits from R&D capitalization by focusing on the role of financial analysts in mitigating information asymmetry. Using a large sample of Korean firms, we find a positive association between analyst coverage and the market valuation of expensed R&D indicating that an analyst's activities can help investors to understand the implications of R&D investments. In contrast, analyst coverage does not significantly improve the valuation of capitalized R&D, suggesting that capitalization itself mitigates information asymmetry between firms and investors. We also find that our results are relevant only for firms with fewer alternative sources of information and firms unaffiliated with business groups.