Do Earnings Volatility Impact On R&D Expenditure?

One of the proxy variable of earnings quality is earnings volatility,which indicates the variation of earnings indicator during given accounting periods.If earnings volatility is large,earnings information may be difficult to predict.What's worse,stock price becomes up and down and corporation value falls.On the other hand,firms with large earnings volatility may face credit risk,financing constraints and even financial distress.Large earnings volatility always derives from intensifying competition of the product or service market.So according to core competence of the corporation theory,firms who enhance core competence will reverse the disadvantaged situation of the market competition.Then stable earnings come.However,it needs to be emphasized that constructing core competence must rely on research and development(R&D)activities.Generally stated,on one hand manages have the motivation to reduce R&D expenditure to improve profits of the current period.On the other hand,manages also have the motivation to increase R&D expenditure,so that core competence of firms can be constructed.But in the reality,whether manages increase R&D investments in order to reverse the disadvantaged situation of the market competition?Basing on contract theory,core competence of the corporation theory and prospect theory,this paper hypothesizes the relation between earnings volatility and R&D expenditure and provides empirical evidence on what earnings volatility impacts on R&D expenditure.This paper take 2010 to 2012 manufacturing listed companies of A Stock in china for sample,meanwhile examines the hypothesis using statistical method,such as descriptives statistics,correlation test and multielement logit regression.Two phenomenons are found.Firstly,the volatility of earnings impacts on firms R&D investments decision-making.Firms with greater future earnings volatility have larger R&D expenditure.Secondly,only high-tech firms with greater future earnings volatility have larger R&D expenditure.However,in non high-tech firms the relation between earnings volatility and R&D expenditure is not statistically significant.The study enlightens us that if firms choose to enhance R&D expenditure to lower the volatility of earnings,effective management of R&D investment activities is needed.This paper suggests the whole process of management of R&D investment activities.At the same time,firms should enhance consciousness of innovation of manages and set out risk sharing mechanism and appropriate incentives system.