Abstract: Investment in Research and Development (R&D) is becoming very important in terms of improving corporate performance. However, the way this investment is treated in accounting has always been contentious. According to International Financial Reporting Standards (IFRS) or International Accounting Standards (IAS) which became mandatory for listed companies in European Union (EU) in 2005, R&D expenditures can be treated as an expense that flows through an income statement or as an intangible asset on a balance sheet, if certain conditions are met. The aforementioned may have significant impact on firm’s market value. Accordingly, the main aim of the study is to evaluate the impact of R&D accounting treatment on firm’s market value. For the purposes of the empirical analysis, data from Germany is used, since, it represents a country with Continental European model of accounting which is dominant throughout the EU. A multiple regression analysis is performed on a dataset of 779 firm-year observations for the period 2005-2016. The results of the study reveal that different accounting treatment of R&D expenditures have different impact on firm’s market value. Capitalised R&D expenditures have a positive impact on firm’s market value while expensed R&D expenditures have a negative impact on firm’s market value. The results will be beneficial for different stakeholders such as managers, R&D policy makers, accounting standard setters and investors alike.