Product market competition, R&D investment choice, and real earnings management

Abstract

Purpose Recent studies in the accounting literature have investigated the economic consequences of R&D capitalization. Discretionary R&D capitalization for target beating can be characterized as a firm signaling private information on its future economic benefits or as opportunistic earnings management. R&D capitalization also has an impact on a firm’s marginal costs and product market competition. The purpose of this paper is to address how firms choose R&D levels for the purpose of meeting or beating their earnings targets and how this influences sequential product market competition. Design/methodology/approach The authors study this issue in a stylized game-theoretic model where R&D choices of a firm are not only strategically made but also used to convey proprietary information to its rival. The model provides a rationale for a firm distorting its R&D level to earn more profits and meet its earnings target. Findings The equilibrium result indicates that before the realization of common cost shock, a firm can influence the output of its accounting system (i.e. meeting an earnings target) through adjusting its R&D choices. This firm will overinvest in R&D, and this will give an opportunity to create some reserves to be used later to earn a higher profit and reach the earnings target. Originality/value This paper contributes to the research on real earnings management in terms of how R&D capitalization affects a firm’s R&D choices by influencing the output of its accounting system through adjusting its R&D choices and the strategic impact of those choices.

Research and development reporting and stock performance: evidence from China

“…It extends and generalizes the findings to emerging market as restrictively reported in the USA and UK from 1978 to 2007 by Anagnostopoulou (2008). The paper also complements Hsiao et al (2017) paper that reports higher R&D and higher accounting performance in terms of profits and earnings. It also supports the results by Isaboke and Chen (2019) with a specific IFRS-like R&D standard.…”

“…Similar results are reported by Zhu et al (2017) that the positive relationship between R&D intensity and firm performance is stronger for China’s better-performed electronics manufacturing firms. Hsiao et al (2017) found that overinvest in R&D help to earn a higher profit and reach the earnings target. Recently, Jeny and Moldovan (2022) find higher value relevance of capitalized than expensed R&D.…”

Do sin firms engage in real activities manipulation to meet earnings benchmarks?

“…Prior studies provide evidence of the existence of RAM (Roychowdhury, 2006; Baber et al , 1991; Bartov, 1993; Bens et al , 2002; Hsiao et al , 2017; Nasir et al , 2018). Roychowdhury (2006) developed empirical measures to proxy for RAM of discretionary expenses and reports that managers avoid reporting losses by undertaking RAM.…”

“…Gunny (2010) provides evidence that managers cut discretionary spending and use sales manipulation and overproduction to meet or beat earnings targets. Hsiao et al (2017) reports that a firm can manage to meet earnings benchmarks by adjusting its R&D choices. Abernathy et al (2014) suggests that management engages less in RAM when a firm is constrained by poor financial conditions, high levels of institutional ownership and low industry market share.…”

الأثر المحفز للأداء السوقي لمنشآت الأعمال وطبيعة القطاع الصناعي على العلاقة بين جائحة كورونا-19 وممارسات إدارة الأرباح ببيئة الأعمال المصرية

“…‫بمنشآت‬ ‫المحيطة‬ ‫والخارجية‬ ‫الداخلية‬ ‫األعمال‬ ‫بيئة‬ ‫على‬ ‫دراماتيكية‬ ‫تغيرات‬ ‫كورونا‬ ‫لجائحة‬ ‫الفجائية‬ ‫الطبيعة‬ ‫أحدثت‬ ‫وقد‬ ‫هذا،‬ ‫األعمال‬ (Ding , et al, Watts & Zimmerman, 1986;Gaver, et al, 1995;Lassoued & Elmir, 2012;Ben rejeb, et al, 2013;Lassoued, 2021;Taylor, et al, Choi, et al, 2011;Walker, 2013;Ozili, 2017) . Kousenidis, et al, 2013;Filip & Raffournier, 2014;Cimini, 2015 Aljawaheri, et al, 2021;Xiao & Xi, 2021;Yan, et al, 2022;Aljughaiman, et al, 2023;Taylor, et al, (Walker, 2013;Cimini, 2015;Kim, et al, 2018;He & Jianqun, 2021;Chen, et al (Chi et al, 2011;Ho, et al, 2015;Xu & Ji, 2016;Hsiao, et al, 2017;Kjaerland, et al, 2021 ‫التنبؤية‬ ‫قدرتها‬ ‫من‬ ‫ويزيد‬ ‫عنها،‬ (e.g. Choi, et al, 2011;Walker, 2013;Ozili, 2017) .…”