This study investigates how information users perceive the accounting information generated from the Financial Supervisory Service’s (FSS) guidance policy on themed audit reviews. Also, the study exhibits how the users affect the value relevance in pharmaceutical industry (including biotech industry). Lastly, it examines the financial characteristics of the pharmaceutical industry via its rate of capitalized research and development (R&D) expenditures.
The results are as follows. When the themed audit review was first conducted in 2018, the capitalized R&D expenditures exhibited high value relevance. This indicates that the investors viewed the continued capitalized R&D expenditures even after the stricter standards applied, as healthy and trustworthy, which ultimately led to their decisions. It is also found that for the FSS-sanctioned firms, the higher their capitalized and expensing R&D expenditures, the higher the value relevance. This shows that investors react only to the published financial data when making investment decisions. Additionally, no relationship is discovered between the capitalized and expensing R&D expenditures and the stock prices before and after any error corrections made in R&D expenditures, showing that information derived from such error corrections do not have an impact on the investors’ decision-making processes. Lastly, an increase in operating cash flows is significantly correlated to the capitalized R&D expenditures, especially in firms that suffered losses. It reflects the unique financial feature of pharmaceutical companies that a failed commercialization following rather optimistic capitalized R&D expenditures lead to excessive impairment losses, ultimately resulting in increases in both operating cash flows and losses.
The reliability of the value relevance of themed audit reviews in the pharmaceutical industry has been enhanced by distinguishing the FSS-sanctioned firms and those that are not sanctioned and by directly utilizing all the data available before and after any corrections are made in R&D expenditures as annotated in the business reports. Furthermore, as this study could not find any consistent results in the value relevance of the FSS-sanctioned firms’ R&D expenditures, the future studies could utilize the non-financial variables to shed more light on this subject.