Earnings Management, Signaling And R&D Capitalization

Enterprises adopt Conditional Capitalization patterns for R&D expenditure as New Accounting Standards. Theoretically, the Capitalization or Expenditure of R&D send a signal reflecting the future economic benefits of R&D activity of the firms, the Capitalization of R&D activity should have better profitability. However in actual operation, the division of research and development stage, and whether meet the conditions of capitalization depend largely on the subjective judgments of the companies, At the same time, as the complexity of R&D activities and the information asymmetry due to R&D activities, it is difficult for shareholders to monitor it, which makes the capitalization of corporate R&D expenditures are likely to be the impact of earnings management. In this case, the signals of R&D capitalization are false. In addition because R&D projects whether can actually bring future economic benefits take a longer time to verify, there is considerable difficulty to distinguish the signal of the R&D capitalization.Firstly, this paper analyzes the influence of earnings management to R&D capitalization, finding that R&D Capitalization is influenced by earnings management degrees and earnings management incentives in the meanwhile .The earnings management incentives shows a significantly positive association with the R&D Capitalization only in"highly active in earnings management"companies.Then this paper further analyzes whether earnings management affects the pricing of R&D Capitalization. The results show that without considering earnings management degrees the market may not be able to price R&D Capitalization; after distinguishing earnings management degrees, the market price R&D Capitalization in"low active in earnings management"companies positively, price R&D Capitalization in"highly active in earnings management"companies negatively. The results proved that, the market may not be able to distinguish between a true and a false signal, but can use an overall assessment of earnings management of the firms to determine the possibility of profits being manipulated. Companies with"low active in earnings management"are less likely to manage earnings by R&D Capitalization, so the market considers it a true signal, price R&D Capitalization positively. At the same time, companies with"highly active in earnings management"manage earnings probably by R&D Capitalization, so the market considers it a false signal, price R&D Capitalization negatively. The research of this paper provided reasonable evidence for New Accounting Standards adopted Conditional Capitalization patterns for R&D expenditure. Although companies probably manage earnings by R&D Capitalization, the market can use an overall assessment of earnings management of the firms to determine the possibility of profits being manipulated, earnings management will not affect the correct pricing to R&D Capitalization.