The relation between R&D accounting treatment and the risk of the firm: Evidence from the Italian market

Abstract

In this paper, we investigate the relation between the different accounting treatments of R&D expenditures and the risk of the entity in order to identify under which treatment insiders are more likely to carry out earnings management. By analysing the R&D investment strategies of a sample of 137 listed Italian entities that complied with the requirements of IAS 38 during fiscal year 2009, following Lantz and Sahut (2005), we calculate several indexes that show the preferences of insiders to account R&D expenditures as costs or capital assets, and we study the relation of such preferences with the risk of the entity, which we measure with the unlevered beta. We hypothesize that the entities, which considered the R&D investments as costs, are the riskiest ones due to the higher probability that insiders carried out earnings management. Our results confirm such hypothesis. This paper could have implications for academics and standard setters that could learn that behind accounting discretion, insiders could opportunistically behave against outsiders.

The Relationship Between Enterprise Financial Risk and R&D Investment Under the Influence of the COVID-19

“…R&D investment would occupy more resources, bringing many uncertainties, such as the loss of investment opportunities. This inevitably brings corresponding financial pressures ( 11 ). Huang et al ( 12 ) adopted individual random effect model to verify the relationship between R&D investment and risk, and the research results showed that R&D investment and bankruptcy risk was significantly positive correlation.…”