Income Smoothing and Discretionary R&amp;D Expenditures of Japanese Firms*

Mande, Vivek; File, Richard; Kwak, Wikil

doi:10.1506/qxbv-uy71-a6w1-fwt4

Cited by 63 publications

(34 citation statements)

References 49 publications

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“…Interestingly, Degeorge et al(1999) identify three earnings threshold that drive earnings management: reporting profits, performance relative to the prior comparable period and performance relative to analysts' earnings projections. Some studies focus on the reduction of investment in R&D in order to smoothen the results around the average analysts forecast (Graham et al, 2005;Perry and Grinaker, 1994;Bange and De Bondt, 1998;Mande et al, 2000). However, some authors document that R&D creates a serious timing problem because most of the annual R&D spent is likely to have occurred before analysts' forecasts (Osma, 2008;Osma and Young, 2009;Dumas, 2012).…”

Section: Randd Expenditures and Earnings Managementmentioning

confidence: 99%

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R D expenditures and earnings targets: evidence from France

Guidara¹

2015

Pressacademia

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Research and development (R&D) investments reduce current-period earnings while the benefits associated with the investments occur in the future. This problem implies an earnings management tool to boost short-term performance. While there is much evidence regarding managerial discretion through R&D capitalization, empirical studies that directly examine managerial discretion through R&D expenditure adjusting have not been widely provided in the European context. This paper seeks to determine if earnings targets influence R&D investment by encouraging R&D cuts after IFRS adoption. Focusing on a French setting, where companies invest heavily in R&D, results show that managers tend to cut the R&D expenditures in order to achieve earnings target. Studying two earnings management incentives: avoidance of losses (positive earnings target) and earnings decreases (positive earning growths target), findings support thresholds assumption and provide evidence on real earnings management through R&D expensing. This empirical research contributes to the literature by providing further evidence that post-FRS, R&D cut is a strategic decision influenced by earnings management to boost performance.

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Section: Randd Expenditures and Earnings Managementmentioning

confidence: 99%

“…Roychowdhury (2006) Beyond the U.S context, Mande et al (2000) show that in the Japanese context managers adjust R&D investments to smoothen profits. Tokuga and Tanaka (2011) In the French context, the only study about myopic R&D investment is conducted by Dumas (2012) over the period 2001-2010.…”

Section: Randd Expenditures and Earnings Managementmentioning

confidence: 99%

R D expenditures and earnings targets: evidence from France

Guidara¹

2015

Pressacademia

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“…With the stereotypical image of a Japanese manager in mind, one might expect there to be no link between R&D spending and achieving earnings targets. However, Mande, File andKwak 2000 (2000, pp. 288-89) found that Japanese firms, at least in several industries, do in fact adjust R&D spending according to current period earnings performance.…”

Section: The Literature and The Hypothesismentioning

confidence: 99%

The Impact of R&D Expenditures on Earnings Management

Grabińska

Grabiński

2017

AOC

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The main goal of the paper is to investigate the relationship between R&D spending and earnings management. While R&D expenditures create some of the most precious assets in today's economy, in many accounting jurisdictions they either may not be recognised as an asset in the balance sheet or their recognition is very limited. The main obstacle is the measurement process's lack of reliability, which is the result of information asymmetry caused by the nature of R&D investments. Additionally technological breakthroughs do not necessarily translate into commercial success.The results of studies conducted until now provide evidence that managers taking responsibility for high-cost R&D projects become more and more emotionally engaged as time passes. In this paper, it is theorised that this phenomenon is also an important factor in earnings management. The following hypothesis is put forward: R&D expenditures are a significant determinant of earnings management after a two-year time lag. The time lag is adopted on the basis of the average length of time a research project lasts.The empirical study was done on the basis of a sample of US stock listed companies (more than 4,500 firm-year observations). The group was chosen because US GAAPs require all R&D costs (with a few exceptions) to be fully expensed. This enables one to easily determine R&D spending, which would not be possible in the case of companies reporting under IFRSs. Regression analysis shows that R&D spending is a statistically significant determinant of earnings management after two and three time lags. The hypothesis was verified, suggesting that R&D investments influence managerial behaviour with regard to earnings management.

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“…Another case is when institutions that have high portfolio turnover and engage in momentum trading they increase the probability that managers reduce R & D to reverse an earnings decline. Mande et al (2000) argued that Japanese managers may be making suboptimal allocations to R & D spending due to the recent recession period and they tested whether Japanese managers adjust R & D spending based on the firm's performance in the short-term by smoothing earnings. Chan et al(2007) using a sample period from 1991 to 2002 tested many hypotheses that turn around the differential long-term market impact of either the expense method or the capitalization method may cause and, thus far, how value-relevant is each one of these two options.…”

Section: Research In Applied Economicsmentioning

confidence: 99%