An experimental examination of the effects of SFAS No. 2 on R&amp;D investment decisions

Cooper, Jean C.; Selto, Frank H.

doi:10.1016/0361-3682(91)90002-v

Cited by 22 publications

(15 citation statements)

References 9 publications

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“…This effect has been observed in studies on both nonsophisticated users, i.e. students and non-professional investors (Belzile, Fortin, & Viger, 2006;Cooper & Selto, 1991;Elliott, 2006;Frederickson & Miller, 2004;Harper et al, 1987;Hodge, Jollineau Kennedy, & Maines, 2004;Maines & McDaniel, 2000), and sophisticated users, namely financial analysts and bankers (Belkaoui, 1992;Brooks, Scott, & Pearson, 1996;Danos, Holt, & Imhoff, 1989;Elliott, 2006;Goldwater & Fogarty, 1995;Harper et al, 1987;Hirst & Hopkins, 1998;Hirst, Hopkins, & Wahlen, 2004;Hopkins et al, 2000;Hopkins, 1996;Munter & Ratcliffe, 1983;Sami & Schwartz, 1992;Viger et al, 2008).…”

Section: Literature Reviewmentioning

confidence: 83%

The impact of the new OHADA accounting system on the judgments and decisions of Cameroonian bankers

Fortin

Dicko

2009

Advances in Accounting

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Section: Literature Reviewmentioning

confidence: 83%

The impact of the new OHADA accounting system on the judgments and decisions of Cameroonian bankers

Fortin

Dicko

2009

Advances in Accounting

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“…Other capital expenditures that are capitalized and amortized do not fit this pattern, suggesting that reporting incentives rather than underlying firm economics drive the result. Similarly, Cooper and Selto (1991) present experimental evidence that managers are less willing to invest in profitable R&D projects when costs are expensed, because they must sacrifice certain current period cash flows for uncertain future cash flows. A variety of studies expand upon these results by demonstrating that transient versus long-term institutional ownership can moderate the effect (Bushee 1998) and that firms trade off R&D investment reduction and accruals manipulation as earnings management tools (Zang 2008;Wang and D'Souza 2007).…”

Section: Background and Hypothesis Development Randd Reporting And mentioning

confidence: 99%

“…S everal studies provide evidence that mandatory expensing of research and development (R&D) expenditures leads managers to underinvest in R&D to meet performance benchmarks (Baber et al 1991;Cooper and Selto 1991;Bushee 1998;Gunny 2005;Zang 2008;Wang and D'Souza 2007;Oswald and Zarowin 2007). Managers presumably engage in this form of real earnings management because a reduction in R&D spending will cause a dollar for dollar increase in pretax income, and R&D capitalization…”

Section: Introductionmentioning

confidence: 99%

R&D Capitalization and Reputation-Driven Real Earnings Management (Partially Retracted)

Seybert

2010

The Accounting Review

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Prior research finds that mandatory expensing induces underinvestment in research and development (R&D). The current study investigates whether capitalization can also create R&D investment problems. Abandoning a capitalized project requires asset impairment, a negative reporting effect that could damage managers' reputations. In an experiment utilizing M.B.A. student participants, I find that managers responsible for initiating an R&D project are more likely to overinvest when R&D is capitalized. I show that high self-monitors (those most likely to alter their behaviors to convey a positive image) are most likely to overinvest, suggesting that reputation concerns contribute to this behavior. A follow-up survey reveals that, when R&D is capitalized, experienced executives anticipate overinvestment and expect project abandonment to have a stronger negative impact on the responsible manager's reputation and future prospects at their firm. The results suggest that managers are held responsible for the external reporting consequences of their projects, such that mandating R&D capitalization may not reduce real earnings management.

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“…Indeed, Graham, Harvey, and Rajgopal (2005) survey and interview more than 400 executives, and document that 78% of executives would forgo a project with positive net present value if the project would cause them to miss short-term earnings targets. Empirical studies of managerial myopic behavior have focused mainly on R&D expenditure and the evidence is consistent with managers myopically cutting investment in R&D to achieve various income objectives (Baber, Fairfield, & Haggard, 1991;Bange & De Bondt, 1998;Bens, Nagar, & Wong, 2002;Cooper & Selto, 1991;Dechow & Sloan, 1991;Jacobs, 1991;Roychowdhury, 2006).…”

Section: Does the Capital Market Punish Managerial Myopia? I Introdumentioning

confidence: 99%

Does the Capital Market Punish Managerial Myopia?

Tong

Zhang

2014

SSRN Journal

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The extant literature provides conflicting arguments on whether the capital market punishes managers' myopic behavior. Stein (1988Stein ( , 1989 argues that the capital market is myopic and will push managers to behave myopically. In contrast, Jensen (1988) believes that the capital market is efficient and will punish managerial myopia.However, empirical studies on how the stock market reacts to managerial myopia are scarce. This study aims to fill in this gap by examining how the capital market reacts to managerial myopia. Using managers' cutting R&D to meet short-term earnings goals as a research setting, this study reveals that the capital market actually penalizes managerial myopia, especially for firms with high investor sophistication. Our results are consistent with Jensen's (1988) contention that the security market is not shortsighted. Additionally, we document that compensation, especially cash compensation, could be one of the reasons why managers behave myopically. JEL classifications: G32; M41

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An experimental examination of the effects of SFAS No. 2 on R&D investment decisions

Cited by 22 publications

References 9 publications

The impact of the new OHADA accounting system on the judgments and decisions of Cameroonian bankers

The impact of the new OHADA accounting system on the judgments and decisions of Cameroonian bankers

R&D Capitalization and Reputation-Driven Real Earnings Management (Partially Retracted)

Does the Capital Market Punish Managerial Myopia?

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