Abstract

http://ssrn.com/abstract=878345
 
 

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Earnings Management: The Effect of Accounting Flexibility on R&D Investment Choices


Sean Wang


University of North Carolina - Kenan-Flagler Business School

Julia D'Souza


Cornell University - Department of Accounting

February 2006

Johnson School Research Paper Series No. 33-06

Abstract:     
This paper attempts to document the effects of accounting flexibility on managers' propensity to cut R&D expenditures. Using Barton and Simko's (2002) NOA/Sales variable as a proxy for accounting flexibility, we find that managers are more (less) likely to cut R&D when accounting flexibility is low (high), and that managers prefer the use of accrual to real earnings management given ample accounting flexibility. Our results are consistent with theoretical papers that posit substitution effects between accounting and real earnings management choices, with managers being more likely to cut R&D when the marginal costs of accounting manipulations are low relative to real earnings manipulations.

Number of Pages in PDF File: 41

Keywords: Accruals, Earnings Management, Real Operations, R&D, Research and Development, Intangibles, Benchmarks, Financial Reporting, Substitution

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Date posted: January 27, 2006  

Suggested Citation

Wang, Sean and D'Souza, Julia, Earnings Management: The Effect of Accounting Flexibility on R&D Investment Choices (February 2006). Johnson School Research Paper Series No. 33-06. Available at SSRN: http://ssrn.com/abstract=878345 or http://dx.doi.org/10.2139/ssrn.878345

Contact Information

Sean Wang
University of North Carolina - Kenan-Flagler Business School ( email )
McColl Building
Chapel Hill, NC 27599-3490
United States

Julia M. D'Souza (Contact Author)
Cornell University - Department of Accounting ( email )
Ithaca, NY 14853
United States
607-255-2349 (Phone)
607-254-4590 (Fax)
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