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R&D EXPENDITURES AND EARNINGS TARGETS: EVIDENCE FROM FRANCE

Year 2015, Volume: 2 Issue: 2, 0 - 0, 29.06.2015

Abstract

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.

References

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  • Accounting Research, 36 (supp.), 161-198. Aboody, D. and Lev, B. (2000). Information asymmetry, R&D and insider gains, The journal of finance, 55 (6), 2747-2766.
  • Affes, H. et Ben Romdhane, R. (2011). L’influence des administrateurs indépendants sur les pratiques de gestion réelle des résultats : cas des entreprises tunisiennes, Comptabilités, économie et société, Montpellier : France
  • (2011), http://hal.archives-ouvertes.fr/hal-00645361
  • Baber, W. R., Faifield, P. M., and Haggard, J. A. (1991). The effect of concern income on discretionary spending decisions: The case of R&D. The Accounting Review, 66(4), 818-829.
  • Baber, W. R., Janakiraman S. and Kang S. H. (1996), Investment opportunities and the structure of executive compensation, Journal of Accounting and Economics, 21, 297-318.
  • Bange, M. M. and De Bondt, W. F. M. (1998). R&D Budgets and Corporate Earnings Targets, Journal of Corporate Finance, 4(2), 153-184.
  • Bens, D. Nagar, V. and Wong, M.H.F. (2002). Real investment implications of employee stock option exercices.
  • Journal of accounting research, 40(2), 359-406. Ben-Zion, U. (1978) The investment aspects of non-productive expenditures: an empirical test, Journal of
  • Economics and Business, 30, 224–229. Berger P.G. (1993). The impact of SFAS n°.131 on information and monitoring. Journal of Accounting Research. 41(2), 163-223.
  • Bhojraj, S., Hribar, P., Picconi, M. and McInnis, J. (2009). Making sense of cents: An examination of firms that marginally miss or beat analyst forecasts. The Journal of Finance, 64(5), 2361-2388.
  • Burgstahler, D. and Dichev, I. (1997). Earnings management to avoid earnings decreases and losses. Journal of
  • Accounting and Economics, 24 (1), 99-126. Bushee, B. (1998). The influence of institutional investors on myopic R&D investment behaviour. The Accounting Review, 73, 305-333.
  • Callimaci, A, and Landry, S. (2003). The Effect of Management Incentives and Cross-Listing Status on the Accounting Treatment of R&D Spending. The Journal of International Accounting, Audit and Taxation, 12(2), 131- 1
  • Chambers, D., Jennings, R. and Thompson, R. B. (2003). Managerial discretion and accounting for research and development costs. Journal of Auditing, Accounting and Finance, 18(1), 79- 114.
  • Chan S.H., Martin, J. and Kensinger, J. (1990). Corporate research and development expenditures and share value. Journal of Financial Economics, 26, 255-276.
  • Chan, K. C., Lakonishok, J., and Sougiannis, T. (2001). The stock market valuation of research and development expenditure. Journal of Finance, 56(6), 2431-2456.
  • Cheng, S. (2004). R&D Expenditures and CEO Compensation. The Accounting Review, 79(2), 305-328.
  • Connolly, R. A., and Hirschey, M. (1984). R&D, market structure and profits: a value-based approach. Review of
  • Economics and Statistics, 66, 682-686. Cornsweet T. C. (1974). Visual Perception: New York, Academic Press
  • Cyert R., March J. (1963). A behavioral theory of the firm, 2ème édition (1992), Blackwell publishers, 252.
  • Daley, L. A. and Vigeland, R. L. (1983). The effects of debt covenants and political costs on the choice of accounting methods: the case of accounting for R&D costs. Journal of Accountingand Economics, 5(décembre), 195-2
  • Davis, L. N. (2001). R&D investments, information and strategy. Technology Analysis & Strategic Management, 13(3), 325-342.
  • Dechow, P. M. and 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. et Sweeney, A. (1996). Causes and consequences of earnings manipulation: an analysis of firms subject to enforcement actions by the SEC, ContemporaryAccounting Research, 13, 1-36.
  • Degeorge, F. Patel, J.S., and Zeckhauser, R.J. (1999). Earnings management to exceed tresholds, Journal of
  • Business, 72(1), 1-35. https://ssrn.com/abstract=138588
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  • Ding, Y., Stolowy, H and Tenenhaus, M. (2007). R&D productivity: an exploratory international study. Review of
  • Accounting and Finance, 6 (1), 86 – 101. Djama, C. Dumas, G. and Martinez, I. (2013). Entreprises innovantes et gestion des résultats comptables.
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  • Dong, J. et Gou, Y. (2010). Corporate governance structure, managerial discretion, and the R&D investment in
  • China. International Review of Economics and Finance, 19, 180-188. Duke, J.C. and Hunt, HG. (1990). An empirical examination of debt covenants restrictions and accounting related debt proxies. Journal of accounting and Economics, 12, 97-122.
  • Dumas, G. (2012). Le comportement myopique d’investissement en R&D : une réalité en France, Post-print hal- 00690955, HAL. http://hal.archivesouvertes. fr/docs/00/69/09/55/PDF/454_Dumas.pdf
  • Eng, L. and Mak, Y. (2003). Corporate Governance and Voluntary Disclosure. Journal of Accounting and Public Policy, 22, 325-345.
  • Fama, E. and Jensen, M. (1983). Separation of Ownership and Control. Journal of Law and Economics, 26 (2), 301-3
  • Fields, T., Lys, T. and Vincent, L. (2001). Empirical research on accounting choice. Journal of Accounting and Economics, 31(1-3), 255–307.
  • Forker, J.J. (1992). Corporate governance and disclosure quality. Accounting and Business Research, 22(86): 111
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  • Harter, C. I., and Harikumar, T. (2004). Management Compensation and Project Life. Journal of Applied Business Research, 20(4), 65–71.
  • He, F., Srinidhi, B., Su. X. and Gul, F. A. (2015). Earnings management by changing R&D expenditure: evidence on the role of CEO stock compensation.Available at SSRN 459040.
  • Healy P. M. (1985). The effect of bonus schemes on accounting decisions. Journal of accounting and economics, 7, 85-107.
  • Healy, P. M., Myers, M., and Howe, S. C. (2002). R&D accounting and the tradeoff between relevance and objectivity. Journal of Accounting Research, 40(3), 677-710.
  • Healy, P.M. et Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13, 365-383.
  • Hirschey, M. (1982). Intangible aspects of advertising and R&D expenditures. Journal of industrial economics, 30, 375-3
  • Ho, Y. K., Tjahjapranata, M. and Yap, C. M. (2006). Size, leverage, concentration and R&D investment in generating growth opportunities, Journal of Business, 44, 393-418.
  • Hôlmstrom, R.W. (1989), Agency costs and innovation, Journal of Economic Behavior and Organisation, 12, 305- 3
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  • Koch, B. S. (1981). Income Smoothing: An Experiment. The Accounting Review, 56 (3), 574- 586.
  • Kothari, S.P. (2001). Capital Market Research in Accounting. Journal of Accounting and Economics, 31, 105-231.
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  • Lev, B. and Zarowin, T. (1999). The boundaries of financial reporting and how to extend them. Journal of
  • Accounting Research, Antumn, 353-385. Mande, V., File, R.G. and Kwak, W. (2000). Income smoothing and discretionary R&D expenditures of Japanese firms. Comptemporary accounting research, 17 (2), 263-302.
  • Markarian, G., Pozza, L. and Prencipe, A. (2008). Capitalization of R&D costs and earnings management: Evidence from Italian listed companies, The International Journal of Accounting, 43, 246–267.
  • Nekhili, M., Boubaker, S. and Lakhal, F. (2012), Ownership Structure, Voluntary R&D Disclosure and Market Value of Firms: The French Case, International Journal of Business, 17(2), 1083-4346.
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  • Nelson, M., Elliott, J., and Tarpley, R. (2003). How are earnings managed? Examples from auditors. Accounting
  • Horizons (Supplement), 17−35. Opler, T., Pinkowitz, L., Stulz, R. and Williamson, R. (1999), The determinants and implications of corporate cash holdings, Journal of Financial Economics, 52, 3-46.
  • Osma, B. G. (2008). Board independence and real earnings management: the case of R&D expenditure.
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  • Percy, M. (2000), Financial reporting discretion and voluntary disclosure corporate research and development expenditure in Australia. Asian Pacific Journal of Accounting and Economics, 7, 1-31.
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Year 2015, Volume: 2 Issue: 2, 0 - 0, 29.06.2015

Abstract

References

  • Aboody, D. and Lev, B. (1998). The Value Relevance of Intangibles: The Case of Software Capitalisation. Journal of
  • Accounting Research, 36 (supp.), 161-198. Aboody, D. and Lev, B. (2000). Information asymmetry, R&D and insider gains, The journal of finance, 55 (6), 2747-2766.
  • Affes, H. et Ben Romdhane, R. (2011). L’influence des administrateurs indépendants sur les pratiques de gestion réelle des résultats : cas des entreprises tunisiennes, Comptabilités, économie et société, Montpellier : France
  • (2011), http://hal.archives-ouvertes.fr/hal-00645361
  • Baber, W. R., Faifield, P. M., and Haggard, J. A. (1991). The effect of concern income on discretionary spending decisions: The case of R&D. The Accounting Review, 66(4), 818-829.
  • Baber, W. R., Janakiraman S. and Kang S. H. (1996), Investment opportunities and the structure of executive compensation, Journal of Accounting and Economics, 21, 297-318.
  • Bange, M. M. and De Bondt, W. F. M. (1998). R&D Budgets and Corporate Earnings Targets, Journal of Corporate Finance, 4(2), 153-184.
  • Bens, D. Nagar, V. and Wong, M.H.F. (2002). Real investment implications of employee stock option exercices.
  • Journal of accounting research, 40(2), 359-406. Ben-Zion, U. (1978) The investment aspects of non-productive expenditures: an empirical test, Journal of
  • Economics and Business, 30, 224–229. Berger P.G. (1993). The impact of SFAS n°.131 on information and monitoring. Journal of Accounting Research. 41(2), 163-223.
  • Bhojraj, S., Hribar, P., Picconi, M. and McInnis, J. (2009). Making sense of cents: An examination of firms that marginally miss or beat analyst forecasts. The Journal of Finance, 64(5), 2361-2388.
  • Burgstahler, D. and Dichev, I. (1997). Earnings management to avoid earnings decreases and losses. Journal of
  • Accounting and Economics, 24 (1), 99-126. Bushee, B. (1998). The influence of institutional investors on myopic R&D investment behaviour. The Accounting Review, 73, 305-333.
  • Callimaci, A, and Landry, S. (2003). The Effect of Management Incentives and Cross-Listing Status on the Accounting Treatment of R&D Spending. The Journal of International Accounting, Audit and Taxation, 12(2), 131- 1
  • Chambers, D., Jennings, R. and Thompson, R. B. (2003). Managerial discretion and accounting for research and development costs. Journal of Auditing, Accounting and Finance, 18(1), 79- 114.
  • Chan S.H., Martin, J. and Kensinger, J. (1990). Corporate research and development expenditures and share value. Journal of Financial Economics, 26, 255-276.
  • Chan, K. C., Lakonishok, J., and Sougiannis, T. (2001). The stock market valuation of research and development expenditure. Journal of Finance, 56(6), 2431-2456.
  • Cheng, S. (2004). R&D Expenditures and CEO Compensation. The Accounting Review, 79(2), 305-328.
  • Connolly, R. A., and Hirschey, M. (1984). R&D, market structure and profits: a value-based approach. Review of
  • Economics and Statistics, 66, 682-686. Cornsweet T. C. (1974). Visual Perception: New York, Academic Press
  • Cyert R., March J. (1963). A behavioral theory of the firm, 2ème édition (1992), Blackwell publishers, 252.
  • Daley, L. A. and Vigeland, R. L. (1983). The effects of debt covenants and political costs on the choice of accounting methods: the case of accounting for R&D costs. Journal of Accountingand Economics, 5(décembre), 195-2
  • Davis, L. N. (2001). R&D investments, information and strategy. Technology Analysis & Strategic Management, 13(3), 325-342.
  • Dechow, P. M. and 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. et Sweeney, A. (1996). Causes and consequences of earnings manipulation: an analysis of firms subject to enforcement actions by the SEC, ContemporaryAccounting Research, 13, 1-36.
  • Degeorge, F. Patel, J.S., and Zeckhauser, R.J. (1999). Earnings management to exceed tresholds, Journal of
  • Business, 72(1), 1-35. https://ssrn.com/abstract=138588
  • Ding, Y. and Stolowy, H. (2003). Capitalisation des frais de R&D en France : déterminants et pertinence. 24ème congrès de l’Association Francophone de Comptabilité, Louvain, mai.
  • Ding, Y., Stolowy, H and Tenenhaus, M. (2007). R&D productivity: an exploratory international study. Review of
  • Accounting and Finance, 6 (1), 86 – 101. Djama, C. Dumas, G. and Martinez, I. (2013). Entreprises innovantes et gestion des résultats comptables.
  • Comptabilit´e sans Fronti`eres..The French Connection, May 2013, Canada. pp.cd-rom.
  • Dong, J. et Gou, Y. (2010). Corporate governance structure, managerial discretion, and the R&D investment in
  • China. International Review of Economics and Finance, 19, 180-188. Duke, J.C. and Hunt, HG. (1990). An empirical examination of debt covenants restrictions and accounting related debt proxies. Journal of accounting and Economics, 12, 97-122.
  • Dumas, G. (2012). Le comportement myopique d’investissement en R&D : une réalité en France, Post-print hal- 00690955, HAL. http://hal.archivesouvertes. fr/docs/00/69/09/55/PDF/454_Dumas.pdf
  • Eng, L. and Mak, Y. (2003). Corporate Governance and Voluntary Disclosure. Journal of Accounting and Public Policy, 22, 325-345.
  • Fama, E. and Jensen, M. (1983). Separation of Ownership and Control. Journal of Law and Economics, 26 (2), 301-3
  • Fields, T., Lys, T. and Vincent, L. (2001). Empirical research on accounting choice. Journal of Accounting and Economics, 31(1-3), 255–307.
  • Forker, J.J. (1992). Corporate governance and disclosure quality. Accounting and Business Research, 22(86): 111
  • Glass, A. L. and Holyoak, K. J. (1986). Cognition: New York, Random House.
  • Graham, J. R., Harvey, C. R and Rajgopal, S. (2005). The economic implications of corporate financial reporting.
  • Journal of Accounting and Economics, 40(1-3), 3-73. Griliches, Z. (1981). Market value, R&D and patents, Economics Letters, 7, 183-187.
  • Gul, F. A. and Leung, S. (2004), Board leadership, outside directors’ expertise and voluntary corporate disclosure,
  • Journal of Accounting and Public Policy, 23, 351-379. Hall, B. H. (2002). The financing of research and development. Oxford review of economic policy, 18(1), 35-51.
  • Harter, C. I., and Harikumar, T. (2004). Management Compensation and Project Life. Journal of Applied Business Research, 20(4), 65–71.
  • He, F., Srinidhi, B., Su. X. and Gul, F. A. (2015). Earnings management by changing R&D expenditure: evidence on the role of CEO stock compensation.Available at SSRN 459040.
  • Healy P. M. (1985). The effect of bonus schemes on accounting decisions. Journal of accounting and economics, 7, 85-107.
  • Healy, P. M., Myers, M., and Howe, S. C. (2002). R&D accounting and the tradeoff between relevance and objectivity. Journal of Accounting Research, 40(3), 677-710.
  • Healy, P.M. et Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13, 365-383.
  • Hirschey, M. (1982). Intangible aspects of advertising and R&D expenditures. Journal of industrial economics, 30, 375-3
  • Ho, Y. K., Tjahjapranata, M. and Yap, C. M. (2006). Size, leverage, concentration and R&D investment in generating growth opportunities, Journal of Business, 44, 393-418.
  • Hôlmstrom, R.W. (1989), Agency costs and innovation, Journal of Economic Behavior and Organisation, 12, 305- 3
  • Jeanjean, T. (2001). Contribution à l'analyse de la gestion du résultat des sociétés cotées. Congré de l’Association
  • Française de Comptabilité. Jensen, M. and Meckling, W. (1976). Theory of the firm: managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3, 305-360.
  • Kahneman, D. and Tversky A. (1979). Prospect theory: an analysis under risk, Econometrica, 47(2), 63-291.
  • Koch, B. S. (1981). Income Smoothing: An Experiment. The Accounting Review, 56 (3), 574- 586.
  • Kothari, S.P. (2001). Capital Market Research in Accounting. Journal of Accounting and Economics, 31, 105-231.
  • Lev, B. and Sougiannis, T. (1996). The capitalization, amortization, and value-relevance of R&D. Journal of accounting and economics, 21 (1), 101-138.
  • Lev, B. and Zarowin, T. (1999). The boundaries of financial reporting and how to extend them. Journal of
  • Accounting Research, Antumn, 353-385. Mande, V., File, R.G. and Kwak, W. (2000). Income smoothing and discretionary R&D expenditures of Japanese firms. Comptemporary accounting research, 17 (2), 263-302.
  • Markarian, G., Pozza, L. and Prencipe, A. (2008). Capitalization of R&D costs and earnings management: Evidence from Italian listed companies, The International Journal of Accounting, 43, 246–267.
  • Nekhili, M., Boubaker, S. and Lakhal, F. (2012), Ownership Structure, Voluntary R&D Disclosure and Market Value of Firms: The French Case, International Journal of Business, 17(2), 1083-4346.
  • McConnell, J. J. and Muscarella, C. J. (1985). Corporate capital expenditure decisions and the market value of the firm, Journal of Financial Economics, 14, 399-422.
  • Nelson, M., Elliott, J., and Tarpley, R. (2003). How are earnings managed? Examples from auditors. Accounting
  • Horizons (Supplement), 17−35. Opler, T., Pinkowitz, L., Stulz, R. and Williamson, R. (1999), The determinants and implications of corporate cash holdings, Journal of Financial Economics, 52, 3-46.
  • Osma, B. G. (2008). Board independence and real earnings management: the case of R&D expenditure.
  • Corporate Governance: An International Review, 16(2), 116-131. Osma, B. G. and Young, S. (2009). R&D expenditure and earnings targets. European Accounting Review, 18(1), 7
  • 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 and accounting, 35 (1-2), 1-24.
  • Oswald, D. R., and Zarowin, P. (2008). Capitalization of R&D and the informativeness of stock prices, European accounting review, forthcoming.
  • Percy, M. (2000), Financial reporting discretion and voluntary disclosure corporate research and development expenditure in Australia. Asian Pacific Journal of Accounting and Economics, 7, 1-31.
  • Perry, S. and Grinaker, R. (1994). Earnings Expectations and Discretionary Research and Development Spending.
  • Accounting Horizons, 8, 43-51. Persson, A. and 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), Supervisor: Jiri Novak.
  • Porter, M. (1992). Capital choices: Changing the way America invests in industry. Boston, MA: Council on
  • Competitiveness/ Harvard Business School. Raffournier, B. (1990). La théorie positive de la comptabilité: une revue de la littérature. Economie et Sociétés,
  • Série Sciences de Gestion, 16, 137-166. Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42(3), 335-370.
  • Saada, T. (1995). Les déterminants des choix comptables : étude des pratiques françaises et comparaison franco- américaine. Comptabilité Contrôle Audit, 1(2), 52-74.
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Details

Journal Section Articles
Authors

Rihab Guidara This is me

Younes Boujelbene This is me

Publication Date June 29, 2015
Published in Issue Year 2015 Volume: 2 Issue: 2

Cite

APA Guidara, R., & Boujelbene, Y. (2015). R&D EXPENDITURES AND EARNINGS TARGETS: EVIDENCE FROM FRANCE. Journal of Economics Finance and Accounting, 2(2).

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