R&amp;D Capitalization and Reputation-Driven Real Earnings Management

Seybert, Nicholas

doi:10.2139/ssrn.1150373

Cited by 33 publications

(34 citation statements)

References 62 publications

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“…Indeed, R&D activity differs by nature from other investments by a number of attributes: firm-specificity, information asymmetry, and high uncertainty (Holmstrom, 1989). Moreover, there is an ongoing debate on R&D accounting choice (Nelson et al, 2003;Chambers et al, 2003;Callimaci and Landry, 2003;Koch, 1981;Markarian et al, 2008;Seybert, 2010;Stadler and Banal-Estan, 2010). Accounting regulation gives firms the managerial choices made upon the R&D accounting treatmentcapitalization or expensing -, the amount of R&D investment, the R&D presentation and the content of R&D information disclosed in annual reports.R&D investments are likely to increase divergence between managers and investors and provide adequate grounds for earnings management.…”

Section: Introductionmentioning

confidence: 99%

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: Introductionmentioning

confidence: 99%

R D expenditures and earnings targets: evidence from France

Guidara¹

2015

Pressacademia

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“…Other factors, including the firms' reputation and/or quality of management, cost structure, type of assets and financial structure are perhaps associated with the likelihood of successful restorations of credit quality for Watchlist firms. For example, Seybert's (2010) experiment suggests that reputation concerns contribute to real earnings management in the form of overinvestment …”

Section: Managers Manipulate Earningsmentioning

confidence: 99%

Do managers manipulate earnings to influence credit rating agencies’ decisions?

Zhao

2017

RAF

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If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation.*Related content and download information correct at time of download. Design/methodology/approach -To measure earnings management activities, this paper computes accrual-based and real earnings management measures in the year or in the quarter immediately before the Watchlist resolutions for all negative and positive Watchlist firms. To examine the association between the levels of earnings management and Watchlist resolutions, a logit model is applied to the data obtained from a sample of Watchlist firms.Findings -Some evidence suggests that managers in Watchlist firms manage earnings in attempts to gain favorable Watchlist treatment. The findings are consistent with the Graham et al. 's (2005) survey evidence, which shows that one of the primary reasons for earnings management is to gain (or preserve) a desirable rating. In addition, CRAs appear to be misled by these attempts during the negative Watchlist process period.Research limitations/implications -The findings support SEC's (2011SEC's ( , 2013aSEC's ( , 2013b Originality/value -While many studies examine whether managers use discretionary accruals as a tool to manage earnings to obtain favorable ratings, those studies do not consider manipulation of real operating activities to manage earnings and CRA perceptions.

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“…In an experimental setting, Seybert () finds evidence of overinvestment given R&D capitalization. Our model provides richer results via a theoretical analysis, though in a completely different setting and thus for a different reason: Under capitalization, the higher the expected growth rate or the larger the growth volatility or the smaller the earnings persistence, the larger the size of overinvestment (Corollary (ii)). …”

Section: Empirical Implicationsmentioning

confidence: 99%

“…Entwistle () conducts field interviews and finds that both executives and analysts tend to oppose capitalization of development costs, citing reasons such as avoiding the need to manage future write‐downs induced by overinvestment. Seybert () finds evidence of overinvestment given R&D capitalization in an experimental setting.…”

Section: Introductionmentioning

confidence: 99%

Expensing Versus Capitalization

Sivaramakrishnan

2017

Contemporary Accting Res

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We develop a theoretical framework to study the effects of expensing versus capitalization of investment expenditures on capital market asset prices, corporate investment, and investment efficiency. We use a two‐period model in which the financial reports at the end of the first period influence the price of the firm. In the first period, the current owner makes an investment decision that yields returns during the first and the second periods. We highlight the benefits and costs of the matching principle in GAAP and identify conditions under which less disclosure improves investment efficiency. We find that, in terms of investment efficiency, expensing beats capitalization if and only if the expected growth rate is high, the growth volatility is large, or the earnings persistence is small. We also offer testable empirical implications for accounting choice and for real earnings management.

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R&D Capitalization and Reputation-Driven Real Earnings Management

Cited by 33 publications

References 62 publications

R D expenditures and earnings targets: evidence from France

R D expenditures and earnings targets: evidence from France

Do managers manipulate earnings to influence credit rating agencies’ decisions?

Expensing Versus Capitalization

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