R&D Expenditures, Earnings Management And Market Reaction

In the era of knowledge economy, the competition pattern of enterprises is turning from tangible assets to intangible ones gradually. As the innovation subject, the only way for the enterprises'survival, development and expansion is maintaining their competitive advantage and sustainable development capacity which depends on the increased research and development (Hereinafter referred to as R&D) input. With the considerable rise of R&D investment, huge R&D expenditures will have a significant impact on the financial situation of enterprises inevitably, as a result, cross-phase arrangement and accounting measurement of R&D by the management will affect the profit performance and related indicators which made R&D expenditures a tool for management to manipulate earnings, in this regard, this paper tests the assumption using empirical methods and explores whether it can be identified by stock market investors.This paper uses the date of listed companies which are National-Recognized Enterprise Technology Centers, by comparing the change of pre-tax earnings before R&D expenditures in the current year VS the previous year (ΔEBRDTt) to the previous year R&D expenditures (RDt-1),divides performance of the these enterprises into excellent, moderate and poor, then studied if the enterprises R&D expenditures can be used as reconciling items of earnings management by way of constructing of Binary Logistic Regression Model.The results show that the management will cut R&D expenditures to avoid profit declining according to the previous accounting standards. Simultaneously, comparing to the enterprises with excellent or poor performance, the moderate ones are more likely to show earnings management using R&D expenditures. In addition, there was also a simple statistical for the enterprises'R&D investment and accounting processing under current accounting standards which shows R&D can still be used as means of earnings management, but they tend to change the partition of expense and capital than cut R&D expenditures. Despite this, the regulation of conditional capitalization of R&D expenditures under current accounting standards mitigates the trend of cutting R&D investment which is conducive to enterprises'long-term development. At the meantime, in order to explore whether the earnings manipulation using R&D expenditures by management can be identified by stock market investors, we use abnormal returns of stocks (AR) as an alternative variables of price, then study the market reaction of these earnings management from linear model between the change of earnings before tax (ΔEARN) and R&D (ΔRD) with shares of abnormal returns. The result shows that, there is significantly positive correlation between abnormal returns of stocks and earnings growth with scarifying R&D expenditures, and this result declares that the investors who fall into the trap of locking function of accounting information fail to recognize earnings management.The conclusion of this article reveals the corporate management'manipulation of R&D investment, and has reference value and theoretical basis for government to develop regulatory systems and policies as well as investors to evaluate the quality of listed companies profit properly.