The Impact of R&D Expenditures on Earnings Management

Abstract

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.

The Effect of R&D Expenditures on Earnings Management: A Research on Bist-All Shares

“…On the other hand, considering firm size and leverage in terms of control variables in Model 1 and Model 2; it is seen that three models, including the current period, one-year and two-year lag, negatively affect earnings management at 1% significance level. Similarly, Daley & Vigeland (1983), Aboody & Lev (1998), Percy (2000), Landry & Callimaci (2003), Wang & D'Souza (2006), Persson & Fuentes (2011), Guidara & Boujelbene (2015), Dinh et al (2016) and Grabińska & Grabiński (2017), size; Mande et al (2000), Markarian et al (2008), Persson & Fuentes (2011) and Grabińska & Grabiński (2017) revealed that the leverage negatively affects earnings management. In terms of return on assets, considering the current period and time lags, Aboody & Lev (1998), Landry & Callimaci (2003), Markarian et al (2008), Persson & Fuentes (2011) and Dinh et al (2016) contrary to their results, a statistically significant relationship could not be determined.…”

“…It is stated in the literature that the effects of R&D expenditures on earnings management appear in the future (Grabińska & Grabiński, 2017). In this framework, the equation used by Grabińska & Grabiński (2017) was taken as a basis in order to demonstrate the impact of R&D expenditures on earnings management. In terms of R&D intensity, two different R&D variables were obtained by dividing the R&D by total assets (R&D1) and net sales (R&D2).…”

“…Considering the R&D intensity, the successful completion of the projects is important in terms of manager reputation. Within this context, it is also stated that earnings can be managed in order to reveal the success of the manager or hide the failure situation (Grabińska & Grabiński, 2017).…”

“…On the other hand, the success or failure of the R&D activities is important for the sustainability of the company and it can affect the interests of the stakeholders, including both shareholders and managers. In addition, this situation can be considered as a criterion in the evaluation of executive performance (Grabińska & Grabiński, 2017). It is stated in the literature that the effect of R&D investments on company profitability can be seen as delayed on average for two years (Lome, Heggeseth & Moen, 2016), but this delay may change in the sectoral context (Pakes & Schankerman, 1984).…”

Ar-Ge Yoğunluğu, Tamamlayıcı Varlıklar ve Firma Değeri: Türkiye için Zaman Serisi Bulguları

“…The main explanatory variables in the research model are two different R&D intensity measures. These are the ratio of total R&D expenditures to net sales as used in related studies of Wang and Thornhill (2010), Katila and Ahuja (2002), Zhang and Mohnen (2013), and Alessandri and Pattit (2014); and the ratio of total R&D expenditures to total assets proposed by Berrone et al (2007) and, Grabinska and Grabinski (2017). Though the first measure is used more frequently in the literature, this combination is more appropriate, because R&D investments and/or expenditures can be expressed relative to either net sales (as R&D intensity), book value of total assets or equity, market value of equity, net income, or total dividends.…”