Equity incentive plans and R&D investment manipulation: evidence from China

This paper examines the issue of earning management in companies with equity incentives from two dimensions: management manipulation of the intensity of R&D and accounting treatment by using a sample of Shanghai and Shenzhen listed companies in China from 2014 to 2019. We find that in order to depress the benchmarks and exercise prices for the performance appraisal of the equity incentive covenants, managers not only conduct accrual earnings management by expensing R&D expenditure but also increase the intensity of R&D investment for real earnings management. We also find that companies with equity incentives where managers have more power are more inclined to opt for the more concealed means of real earnings management and try to avoid accrual earnings management, which may entail higher regulatory costs and greater litigation risk with tightening accounting regulations. Our findings contribute to expanding the literature on earnings management of companies with equity incentives and provide empirical evidence for regulators to implement ‘precision regulation’ on equity incentives and earnings management.