Does Research and Development Activity Increase Accrual-Based Earnings Management?

Abstract

Prior literature suggests that research and development (R&D) activity is associated with volatile earnings and that, in general, managers perceive earnings volatility as unfavorable and seek to avoid it. Accordingly, I hypothesize and find that the extent to which firms engage in R&D (R&D intensity) is positively associated with the extent to which they engage in accrual-based earnings management, as measured by discretionary accruals. I also find that greater R&D intensity is associated with a smaller positive effect of discretionary accruals on earnings volatility, suggesting that R&D intensity and discretionary accruals constitute non-additive sources of information uncertainty. This study provides empirical evidence of the prevalence of earnings management practices in R&D-intensive industries, supporting conjectures of regulators, practitioners, and academics.

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