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This study examines the impact of implementing supervisory guidelines on pharmaceutical industry firms’ R&D capitalization accounting practices and their actual investment decisions on discretionary R&D expenditures. By detecting a decrease in the growth rate of overall R&D expenditures in pharmaceutical industry firms following the implementation of the supervisory guideline, we hypothesize that the guideline affects firms’ investment behavior beyond accounting practices. First, this study uses 17,996 firm-year observations for 2011-2021 to demonstrate the positive relationship between R&D capitalization and discretionary R&D expenditures to verify the potential link to managerial opportunism. Furthermore, this study shows that this relationship persists even after implementing supervisory guidelines, suggesting the necessity for ongoing regulation over R&D capitalization. Finally, employing a difference- in-differences analysis, this study identifies a negative causa l effect of supervisory guidelines on discretionary R&D expenditure. Several robustness tests, including controlling for confounding factors, using a balanced sample of difference- in-differences, and employing a propensity score- matched sample of difference- in-differences, further validate this negative causal effect. The results of this study provide practical implications for regulators and investors, suggesting that strict R&D capitalization guidelines worked effectively to reduce the discretionary capitalization of R&D expenditures that are unclear about future profitability
