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R&D Expenditure and Earnings Targets

Author

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  • Beatriz Garcia Osma
  • Steven Young

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.

Suggested Citation

  • Beatriz Garcia Osma & Steven Young, 2009. "R&D Expenditure and Earnings Targets," European Accounting Review, Taylor & Francis Journals, vol. 18(1), pages 7-32.
    • Handle: RePEc:taf:euract:v:18:y:2009:i:1:p:7-32
    DOI: 10.1080/09638180802016718
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    Cited by:

    1. Olukemi Fasipe & Huey-Lian Sun, 2020. "Real activities manipulation in stock-for-stock mergers," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 44(3), pages 570-586, July.
    2. Luo, Yonggen & Wu, Huiying & Ying, Sammy Xiaoyan & Peng, Qiuping, 2022. "Do company visits by institutional investors mitigate managerial myopia in R&D investment? Evidence from China," Global Finance Journal, Elsevier, vol. 51(C).
    3. Kang Sung Hur & Dong Hyun Kim & Joon Hei Cheung, 2019. "Managerial Overconfidence and Cost Behavior of R&D Expenditures," Sustainability, MDPI, vol. 11(18), pages 1-13, September.
    4. repec:hur:ijaraf:v:4:y:2014:i:2:p:85-97 is not listed on IDEAS
    5. Tahinakis, Panayiotis D., 2014. "R&D expenditures and earnings management: Evidence from Eurozone countries in crisis," The Journal of Economic Asymmetries, Elsevier, vol. 11(C), pages 104-119.
    6. Tunyi, Abongeh A. & Ntim, Collins G. & Danbolt, Jo, 2019. "Decoupling management inefficiency: Myopia, hyperopia and takeover likelihood," International Review of Financial Analysis, Elsevier, vol. 62(C), pages 1-20.
    7. Pappas, Kostas & Walsh, Eamonn & Xu, Alice Liang, 2019. "Real earnings management and loan contract terms," The British Accounting Review, Elsevier, vol. 51(4), pages 373-401.
    8. Atoche, Teresa duarte & Pérez lópez, José ángel & Camúñez ruiz, Jose antonio, 2012. "La relevancia de los gastos de I+D. Estudio empírico en el sector del automóvil," Revista de Contabilidad - Spanish Accounting Review, Elsevier, vol. 15(2), pages 257-286.
    9. Charlotte L. Schuster & Alexander T. Nicolai & Jeffrey G. Covin, 2020. "Are Founder-Led Firms Less Susceptible to Managerial Myopia?," Entrepreneurship Theory and Practice, , vol. 44(3), pages 391-421, May.
    10. Zalata, Alaa Mansour & Roberts, Clare, 2017. "Managing earnings using classification shifting: UK evidence," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 29(C), pages 52-65.
    11. Dargenidou, Christina & Jackson, Richard H.G. & Tsalavoutas, Ioannis & Tsoligkas, Fanis, 2021. "Capitalisation of R&D and the informativeness of stock prices: Pre- and post-IFRS evidence," The British Accounting Review, Elsevier, vol. 53(4).
    12. F. Tsoligkas & I. Tsalavoutas, 2011. "Value relevance of R&D in the UK after IFRS mandatory implementation," Applied Financial Economics, Taylor & Francis Journals, vol. 21(13), pages 957-967.
    13. Tami Dinh & Helen Kang & Wolfgang Schultze, 2016. "Capitalizing Research & Development: Signaling or Earnings Management?," European Accounting Review, Taylor & Francis Journals, vol. 25(2), pages 373-401, June.
    14. Chung, Tuck Siong & Low, Angie, 2017. "The impact of investor impatience and environmental turbulence on myopic marketing management and stock performance," International Journal of Research in Marketing, Elsevier, vol. 34(3), pages 660-677.
    15. Guillaume Dumas, 2012. "Le Comportement Myopique D'Investissement En R&D : Une Realite En France ?," Post-Print hal-00690955, HAL.
    16. Biggerstaff, Lee & Blank, Brian & Goldie, Brad, 2019. "Do incentives work? Option-based compensation and corporate innovation," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 415-430.
    17. Yasar Bayraktar & Asiye Tutuncu, 2020. "The Effect of R&D Expenditures on Earnings Management: A Research on Bist-All Shares," Istanbul Business Research, Istanbul University Business School, vol. 49(2), pages 301-315, November.
    18. Li, Zhaochu & Lytvynenko, Iryna P. & Philippoff, Karl S., 2021. "Stock market reactions to R&D cuts used to manage earnings," International Review of Financial Analysis, Elsevier, vol. 77(C).
    19. Rihab Guidara & Younes Boujelbene, 2014. "R&D-Based Earnings Management and Accounting Performance Motivation," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(2), pages 81-93, April.
    20. Ya-Fang Wang & Yen-Fang Kuo, 2020. "Exploring the Family Effect on Innovative Capacity and Earnings Management," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 13(2), pages 39-61, September.

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