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Capitalised development costs and future cash flows: The effect of CEO overconfidence and board gender diversity

Almaghrabi, Khadija S.; Slack, Richard; Tsalavoutas, Ioannis; Tsoligkas, Fanis

Capitalised development costs and future cash flows: The effect of CEO overconfidence and board gender diversity Thumbnail


Authors

Khadija S. Almaghrabi

Ioannis Tsalavoutas

Fanis Tsoligkas



Abstract

Capitalisation of development costs mandated under IAS 38 is an important accounting issue conveying a signal to users of accounting information regarding future economic benefits. Using a longitudinal sample of UK firms, firstly, we examine the adverse effect of CEO overconfidence levels on the association between capitalised development costs and future economic benefits, proxied by cash flows. Secondly, we examine the moderating influence of board gender diversity on this association. We find that the association between capitalised development costs and future cash flows, while positive, is significantly weaker for firms with higher levels of CEO overconfidence, implying that the signalling effect of capitalisation is diluted. Moreover, our results show that board gender diversity significantly moderates the managerial bias associated with high overconfidence levels, helping to restore the neutrality of accounting and the strength of signalling with regards to future economic benefits.

Journal Article Type Article
Acceptance Date Jun 15, 2024
Online Publication Date Jun 17, 2024
Publication Date Jun 17, 2024
Deposit Date Jun 17, 2024
Publicly Available Date Jul 12, 2024
Journal The British Accounting Review
Print ISSN 0890-8389
Electronic ISSN 1095-8347
Publisher Elsevier
Peer Reviewed Peer Reviewed
Article Number 101426
DOI https://doi.org/10.1016/j.bar.2024.101426
Public URL https://durham-repository.worktribe.com/output/2485061

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