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

41 Pages Posted: 27 Jan 2006  

Sean Wang

Rice University

Julia D'Souza

Cornell University - Department of Accounting

Date Written: February 2006

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.

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

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: https://ssrn.com/abstract=878345 or http://dx.doi.org/10.2139/ssrn.878345

Sean Wang

Rice University ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

HOME PAGE: http://business.rice.edu/person/sean-wang

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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