Firms with intensive R&D and intangible activities (high-tech) have incentives to choose real over accrual-based earnings management than those with less activity (low-tech). Real earnings management techniques have greater benefits than accrual methods because they receive less scrutiny and are less easily detected by regulators and investors. We find that high-tech firms exhibit more real and less accrual-based earnings management than do the low-tech firms. Using a 2SLS regression analysis, we find that R&D activities facilitate the choices of real over accrual methods for high-tech firms when compared to the matched low-tech firms. Our evidence is important, because it shows that the choices of real versus accrual-based earnings management depend perhaps on R&D and intangible activities. In further tests, we investigate whether the choices of earnings management techniques enhance comparability. We find that the choices appear to make accounting amounts (earnings and equity book value) comparable for high-tech and low-tech firms that report economic gains. Thus, our evidence suggests that R&D and intangible activities facilitate the choices of real versus accrual-based earnings management which in turn make accounting amounts comparable.
Year Project Started:
Gordian A. Ndubizu and Hai Q. Ta
Drexel University and University of Massachusetts Dartmouth
(e.g type 1000 for 1,000)