R&D Cuts and Subsequent Reversals: Meeting or Beating Quarterly Analyst Forecasts

38 Pages Posted: 23 Feb 2014

See all articles by John Shon

John Shon

Fordham University

Meng Yan

Fordham University - Gabelli School of Business

Date Written: February 21, 2014

Abstract

Among firms that meet or beat earnings expectations, we find that cuts to R&D spending are more prevalent in Q4 relative to other interim quarters. This is consistent with the relative costs of real activities management (accruals-based earnings management) decreasing (increasing) in Q4 due to the annual audit. More importantly, we find that the subsequent reversal of such R&D cuts is more prevalent and economically more significant following Q4 cuts relative to the reversals that follow cuts in other interim quarters. Our findings suggest that examination at the quarterly level (rather than annual level) lends new insights into the current debate regarding the prevalence of potentially value-destroying R&D cuts that managers make. Indeed, our findings suggest that such cuts may merely be temporary deferrals of R&D outlays.

Keywords: real earnings management; analyst forecasts; quarterly R&D spending; reversal of discretionary expenses

JEL Classification: G31; G38; M41

Suggested Citation

Shon, John and Yan, Meng, R&D Cuts and Subsequent Reversals: Meeting or Beating Quarterly Analyst Forecasts (February 21, 2014). European Accounting Review, Forthcoming; Fordham University Schools of Business Research Paper No. 2399621. Available at SSRN: https://ssrn.com/abstract=2399621

John Shon

Fordham University ( email )

113 West 60th Street
New York, NY 10019
United States

Meng Yan (Contact Author)

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
Bronx, NY 10458
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
103
Abstract Views
897
rank
259,691
PlumX Metrics