1. In your own words, what is value relevance and why do we care whether accounting information is value relevant?

Lev and Sougiannis (Journal of Accounting and Economics, 1996) investigate the issues of reliability, objectivity and value-relevance of capitalized research and development expenditures. Please read the abstract, introduction (section 1), and summary (section 7) of the study (posted on Canvas) and answer the following questions. When reading, you can focus your attention on the studys motivation, results and conclusion.

2. Briefly discuss the motivation for the study. Why were Lev and Sougiannis interested in studying the capitalization of research and development expenditures?

3. Discuss whether the evidence presented by Lev and Sougiannis is consistent with the market efficiency arguments that we have discussed in class, and that are presented in chapters 4 and 5 of your text. Your discussion should refer to and explain the specific result that provides a basis for your conclusion.