Managerial incentives and the treatment of pre-production expenditure in the mining industry

This study investigates the extent of capitalization of pre-production expenditure for the 2003 financial year by 152 mining sector firms listed in Australia, Canada, South Africa, the United Kingdom and the United States of America. Level of capitalization was associated with higher leverage, lower profitability and reporting a negative earnings figure if pre-production expenditure was written off instead of capitalized. Similar to firms in the oil and gas industry, explorer firms were more likely to capitalize preproduction expenditure than producer firms. Although policy choice is relatively transparent, it appears that managers of producer firms are responding to incentives to present a more favorable view of their financial position and performance.