Proponents of the R&D capitalization method have long argued that expensing R&D incentivizes myopic managers to cut R&D to manage short-term profits, leading to underinvestment in R&D. However, we argue that R&D capitalization is not a panacea. Using a sample of U.S. software firms from 2007 to 2010, we document the first archival empirical evidence that R&D capitalization can lead to subsequent over-investment in R&D. This finding is consistent with the view that, to save their reputation, managers of R&D capitalizing firms are reluctant to report impairment of capitalized R&D. Consequently, capitalizing firms tend to continue those R&D projects with bleak prospects and thus over-invest in R&D. A further analysis indicates that effective monitoring from a firm's board of directors can discipline managers for overinvestment in R&D.