Research Article
BibTex RIS Cite

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

Year 2020, , 301 - 315, 30.11.2020
https://doi.org/10.26650/ibr.2020.49.0044

Abstract

R&D expenditures are important in increasing the level of information and technological development. Efficiency in production, cost reduction and competitive advantage are achieved with the added value created by successful R&D activities. However, in the process of accounting and reporting the R&D expenditures, some manipulative applications can be implemented by the business management for achieving personal or corporate targets. The purpose of this research is to reveal the effect of R&D expenditures on earnings management. In this context, from 2007 to 2018, 65 companies that made R&D expenditures included in BIST-All Shares Index were examined. The earnings management effect calculated on the Modified Jones Model, taking into account the current period, one-year and two-year time lag of R&D expenditures was tested with panel data analysis. As a result of the research, it was determined that R&D expenditures negatively affect earnings management in the current period and positively in lagged periods. In addition, while size and leverage have negative effects on earnings management in the current period, one-year and two-year time lag, no statistically significant relationship was found in terms of return on assets.

Supporting Institution

The author declared that this study has received no financial support.

References

  • Aboody, D. & Lev, B. (1998). The value relevance of intangibles: The case of software capitalization. Journal of Accounting Research, 36, 161-191.
  • Aboody & Lev, B. (2000). Information asymmetry, R&D and insider gains. The Journal of Finance, 55(6), 2747-2766.
  • Burgstahler, D., & Dichev, I. (1997). Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economics, 24, 99-126.
  • Cristin, N. T. (2014). The accounting for intangible assets and impact of assets impairment. Ovidius University Annals, Series Economic Sciences, 14(1), 684-689.
  • Daley, L. A., & Vigeland, R. L. (1983). The effects of debt covenants and political costs on the choice of accounting methods. Journal of Accounting and Economics, 5, 195-211.
  • DeAngelo, L. (1986). Accounting numbers as market valuation substitutes: A study of management buy outs of public stockholders. The Accounting Review 61(3), 400-420.
  • Dechow, P. M., & Sloan, R. G. (1991). Executive incentives and the horizon problem: An empirical investigation. Journal of Accounting and Economics, 14(1), 51-89.
  • Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. The Accounting Review, 70(2), 193-225.
  • Dechow, P., & Skinner, D. (2000). Earnings management: Reconciling the views of accounting academic, practitioners and regulators. Accounting Horizons, 14(2), 235-250.
  • Dinh, T., & Schultze, W. (2011). Capitalizing research&development and other information: The incremental information content of accruals vs. cash flows. Journal of Management Control, 22, 241-278.
  • Dinh, T., Kang, H., & Schultze, W. (2016). Capitalizing research&development: Signaling or earning management?. European Accounting Review, 25(2), 373-401.
  • Dumas, G. (2017). Processual earnings management: A study of R&D spending of french listed companies. Comptabilite-Controle-Audit, 23(2), 111-141.
  • Grabińska, B., & Grabiński, K. (2017). The impact of R&D expenditures on earnings management. Argumenta Oeconomica Cracoviensia, 17, 53-72.
  • Guidara, R., & Boujelbene, Y. (2014). R&D based earnings management and accounting performance. International Journal of Academic Research in Accounting, Finance and Management Sciences, 4(2), 81-93.
  • Guidara, R., & Boujelbene, Y. (2015). R&D expenditures and earnings targets: Evidence from France. Journal of Economics, Finance and Accounting, 2(2), 164-180.
  • Healy, P. M. (1985). The effect of bonus schemes on accounting decisions. Journal of Accounting and Economics 7(1-3), 85-107.
  • Healy, P. M., Myers, S. C., & Howe, C. D. (2002). R&D accounting and the tradeoff between relevance and objectivity. Journal of Accounting Research, 40(3),677-710.
  • Hirschey, M. & Weygandt, J. (1985). Amortization policy for advertising and research and development expenditures. Journal of Accounting Research, 23(1), 326-335.
  • Hughes, K. (1988). The interpretation and measurement of R&D intensity-A note. Research Policy, 17, 301-307.
  • Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193-228.
  • Kothari, S. P., Leone, A. J., & Wasley, C. A. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39, 163-197.
  • Kumari, P., & Mishra, C. S. (2019). Value relevance of R&D reporting in India: Significance of intangible intensity. Journal of Financial Reporting and Accounting, 17(3), 432-448.
  • Khidmat, B. W., Wang, M., & Awan, S. (2019). The value relevance of R&D and free cash flows in an efficient investment setup. Asian Journal of Accounting Research, 4(1), 95-111.
  • Landry, S., & Callimaci, A. (2003). The effect of management incentives and cross-listing status on the accounting treatment of R&D spending. Journal of International Accounting, Auditing&Taxation, 12, 131-152.
  • Larcker, D. F., & Richardson, S. A. (2004). Fees paid to audit firms, accrual choices and corporate governance. Journal of Accounting Research, 42(3), 625-658.
  • Lome, O., Heggeseth, A. G., & Moen, Q. (2016). The effect of R&D on performance: Do R&D-intensive firms handle a financial crisis better?. Journal of High Technology Management Research, 27, 65-77.
  • Mande, V., File, R. G., & Kwak, W. (2000). Income smoothing and discretionary expenditures of Japanese firms. Contemporary Accounting Research, 17(2), 263-302.
  • Markarian, G., Pozza, L., & Prencipe, A. (2008). Capitalization of R&D costs and earnings management: Evidence from Italian listed companies. The International Journal of Accounting, 43(3), 246-267.
  • Mulford, C., & Comiskey, E. (2002). The financial numbers game, detecting creative accounting practices. John Wiley&Sons. Inc., New York, USA.
  • OECD (2020). Main science and technology ındicators. 2019(2). OECD Publishing, Paris-France.
  • Osma, B. G., & Young, S. (2009). R&D expenditure and earnings targets. European Accounting Review, 18(1), 7-32.
  • Oswald, D. R. (2008). The determinants and value relevance of the choice of accounting for research and development expenditures in the United Kingdom. Journal of Business Finance & Accounting, 35(1), 1-24.
  • Oswald, D. R., & Zarowin, P. (2007). Capitalization of R&D and informativeness of stock prices. European Accounting Review, 16(4), 703-726.
  • Pakes, A., & Schankerman, M. (1984). The rate of obsolescence of patents, research gestation lags, and the private rate of return to research resources. In Z. Griliches (Ed.), R&D, Patents, and Productivity. University of Chicago Press.
  • Perry, S., & Grinaker, R. (1994). Earnings expectations and discretionary research and development spending. Accounting Horizons, 8(4), 43-51.
  • Percy, M. (2000). Financial reporting discretion and voluntary disclosure: Corporate research and development expenditure in Australia. Asia-Pacific Journal of Accounting & Economics, 7(1), 1-31.
  • Persson, A., & Fuentes, K. (2011). R&D capitalization and the income smoothing hypothesis-A study of Swedish listed companies. Master Thesis in Accounting, Auditing and Analysis, 1-29.
  • Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42(3), 335-370.
  • Schipper, K. (1989). Earnings management. Accounting Horizon, 66(4), 91-102.
  • Seybert, N. (2010). R&D capitalization and reputation-driven real earnings management. The Accounting Review, 85(2), 671-693.
  • Shah, S. Z. A., Butt, S., & Tariq, Y. B. (2013). International financial reporting standards and the value relevance of R&D expenditures: Pre and post IFRS analysis. International Review of Financial Analysis, 30, 158-169.
  • TUBITAK (2019). Gerçekleştirilen sektörler bazında ar-ge harcamaları. Erişim adresi: https://www.tubitak.gov.tr/sites/default/files/289/bty15_1.pdf
  • Tucker, J. W., & Zarowin, P. A. (2006). Does income smoothing improve earnings informativeness. The Accounting Review, 81(1), 251-270.
  • Wang, S., & D’Souza, J. (2006). Earning management: The effect of accounting flexibility on R&D investment choices. Johnson School Research Paper Series, 33-06, 1-39.
  • Zicke, J. (2014). Capitalization of R&D costs and implications for earnings management. Retrieved from https://ssrn.com/abstract=2198307
Year 2020, , 301 - 315, 30.11.2020
https://doi.org/10.26650/ibr.2020.49.0044

Abstract

References

  • Aboody, D. & Lev, B. (1998). The value relevance of intangibles: The case of software capitalization. Journal of Accounting Research, 36, 161-191.
  • Aboody & Lev, B. (2000). Information asymmetry, R&D and insider gains. The Journal of Finance, 55(6), 2747-2766.
  • Burgstahler, D., & Dichev, I. (1997). Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economics, 24, 99-126.
  • Cristin, N. T. (2014). The accounting for intangible assets and impact of assets impairment. Ovidius University Annals, Series Economic Sciences, 14(1), 684-689.
  • Daley, L. A., & Vigeland, R. L. (1983). The effects of debt covenants and political costs on the choice of accounting methods. Journal of Accounting and Economics, 5, 195-211.
  • DeAngelo, L. (1986). Accounting numbers as market valuation substitutes: A study of management buy outs of public stockholders. The Accounting Review 61(3), 400-420.
  • Dechow, P. M., & Sloan, R. G. (1991). Executive incentives and the horizon problem: An empirical investigation. Journal of Accounting and Economics, 14(1), 51-89.
  • Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. The Accounting Review, 70(2), 193-225.
  • Dechow, P., & Skinner, D. (2000). Earnings management: Reconciling the views of accounting academic, practitioners and regulators. Accounting Horizons, 14(2), 235-250.
  • Dinh, T., & Schultze, W. (2011). Capitalizing research&development and other information: The incremental information content of accruals vs. cash flows. Journal of Management Control, 22, 241-278.
  • Dinh, T., Kang, H., & Schultze, W. (2016). Capitalizing research&development: Signaling or earning management?. European Accounting Review, 25(2), 373-401.
  • Dumas, G. (2017). Processual earnings management: A study of R&D spending of french listed companies. Comptabilite-Controle-Audit, 23(2), 111-141.
  • Grabińska, B., & Grabiński, K. (2017). The impact of R&D expenditures on earnings management. Argumenta Oeconomica Cracoviensia, 17, 53-72.
  • Guidara, R., & Boujelbene, Y. (2014). R&D based earnings management and accounting performance. International Journal of Academic Research in Accounting, Finance and Management Sciences, 4(2), 81-93.
  • Guidara, R., & Boujelbene, Y. (2015). R&D expenditures and earnings targets: Evidence from France. Journal of Economics, Finance and Accounting, 2(2), 164-180.
  • Healy, P. M. (1985). The effect of bonus schemes on accounting decisions. Journal of Accounting and Economics 7(1-3), 85-107.
  • Healy, P. M., Myers, S. C., & Howe, C. D. (2002). R&D accounting and the tradeoff between relevance and objectivity. Journal of Accounting Research, 40(3),677-710.
  • Hirschey, M. & Weygandt, J. (1985). Amortization policy for advertising and research and development expenditures. Journal of Accounting Research, 23(1), 326-335.
  • Hughes, K. (1988). The interpretation and measurement of R&D intensity-A note. Research Policy, 17, 301-307.
  • Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193-228.
  • Kothari, S. P., Leone, A. J., & Wasley, C. A. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39, 163-197.
  • Kumari, P., & Mishra, C. S. (2019). Value relevance of R&D reporting in India: Significance of intangible intensity. Journal of Financial Reporting and Accounting, 17(3), 432-448.
  • Khidmat, B. W., Wang, M., & Awan, S. (2019). The value relevance of R&D and free cash flows in an efficient investment setup. Asian Journal of Accounting Research, 4(1), 95-111.
  • Landry, S., & Callimaci, A. (2003). The effect of management incentives and cross-listing status on the accounting treatment of R&D spending. Journal of International Accounting, Auditing&Taxation, 12, 131-152.
  • Larcker, D. F., & Richardson, S. A. (2004). Fees paid to audit firms, accrual choices and corporate governance. Journal of Accounting Research, 42(3), 625-658.
  • Lome, O., Heggeseth, A. G., & Moen, Q. (2016). The effect of R&D on performance: Do R&D-intensive firms handle a financial crisis better?. Journal of High Technology Management Research, 27, 65-77.
  • Mande, V., File, R. G., & Kwak, W. (2000). Income smoothing and discretionary expenditures of Japanese firms. Contemporary Accounting Research, 17(2), 263-302.
  • Markarian, G., Pozza, L., & Prencipe, A. (2008). Capitalization of R&D costs and earnings management: Evidence from Italian listed companies. The International Journal of Accounting, 43(3), 246-267.
  • Mulford, C., & Comiskey, E. (2002). The financial numbers game, detecting creative accounting practices. John Wiley&Sons. Inc., New York, USA.
  • OECD (2020). Main science and technology ındicators. 2019(2). OECD Publishing, Paris-France.
  • Osma, B. G., & Young, S. (2009). R&D expenditure and earnings targets. European Accounting Review, 18(1), 7-32.
  • Oswald, D. R. (2008). The determinants and value relevance of the choice of accounting for research and development expenditures in the United Kingdom. Journal of Business Finance & Accounting, 35(1), 1-24.
  • Oswald, D. R., & Zarowin, P. (2007). Capitalization of R&D and informativeness of stock prices. European Accounting Review, 16(4), 703-726.
  • Pakes, A., & Schankerman, M. (1984). The rate of obsolescence of patents, research gestation lags, and the private rate of return to research resources. In Z. Griliches (Ed.), R&D, Patents, and Productivity. University of Chicago Press.
  • Perry, S., & Grinaker, R. (1994). Earnings expectations and discretionary research and development spending. Accounting Horizons, 8(4), 43-51.
  • Percy, M. (2000). Financial reporting discretion and voluntary disclosure: Corporate research and development expenditure in Australia. Asia-Pacific Journal of Accounting & Economics, 7(1), 1-31.
  • Persson, A., & Fuentes, K. (2011). R&D capitalization and the income smoothing hypothesis-A study of Swedish listed companies. Master Thesis in Accounting, Auditing and Analysis, 1-29.
  • Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42(3), 335-370.
  • Schipper, K. (1989). Earnings management. Accounting Horizon, 66(4), 91-102.
  • Seybert, N. (2010). R&D capitalization and reputation-driven real earnings management. The Accounting Review, 85(2), 671-693.
  • Shah, S. Z. A., Butt, S., & Tariq, Y. B. (2013). International financial reporting standards and the value relevance of R&D expenditures: Pre and post IFRS analysis. International Review of Financial Analysis, 30, 158-169.
  • TUBITAK (2019). Gerçekleştirilen sektörler bazında ar-ge harcamaları. Erişim adresi: https://www.tubitak.gov.tr/sites/default/files/289/bty15_1.pdf
  • Tucker, J. W., & Zarowin, P. A. (2006). Does income smoothing improve earnings informativeness. The Accounting Review, 81(1), 251-270.
  • Wang, S., & D’Souza, J. (2006). Earning management: The effect of accounting flexibility on R&D investment choices. Johnson School Research Paper Series, 33-06, 1-39.
  • Zicke, J. (2014). Capitalization of R&D costs and implications for earnings management. Retrieved from https://ssrn.com/abstract=2198307
There are 45 citations in total.

Details

Primary Language English
Subjects Business Administration
Journal Section Articles
Authors

Yasar Bayraktar This is me 0000-0002-6974-5292

Asiye Tutuncu This is me 0000-0001-9473-9401

Publication Date November 30, 2020
Submission Date March 9, 2020
Published in Issue Year 2020

Cite

APA Bayraktar, Y., & Tutuncu, A. (2020). The Effect of R&D Expenditures on Earnings Management: A Research on Bist-All Shares. Istanbul Business Research, 49(2), 301-315. https://doi.org/10.26650/ibr.2020.49.0044

For more information about IBR and recent publications, please visit us at IU Press.