R&D Expenditure and Earnings Targets

37 Pages Posted: 20 Feb 2008

See all articles by Beatriz Garcia Osma

Beatriz Garcia Osma

Universidad Carlos III de Madrid - Department of Business Administration

Steven Young

Lancaster University - Department of Accounting and Finance

Abstract

This paper examines whether firms cut R&D spending in response to short-term earnings pressures and how equity markets interpret such behaviour. Failure to report positive earnings and earnings growth increases the probability of a subsequent cut in R&D spending, while pressure to report positive earnings and earnings growth in the current period leads to contemporaneous cuts in R&D investment. On average, investors place less weight on earnings increases accompanied by unexpected cuts in R&D spending. However, the magnitude of the valuation discount varies according to the perceived reason for the cut and the importance of R&D investment as a driver of firm value.

Keywords: R&D expenditure, real earnings management, earnings targets, valuation

JEL Classification: M41, M43, G12, G31

Suggested Citation

Garcia Osma, Beatriz and Young, Steven, R&D Expenditure and Earnings Targets. European Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1095699

Beatriz Garcia Osma (Contact Author)

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

Steven Young

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+441 5245-94242 (Phone)
+441 5248-47321 (Fax)

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