The Relationship between R&D Spending and the Earnings Management of Japanese Electronics Companies : A case of earnings management through real management activity

Abstract

Japanese companies have been prohibited from using accrual manipulation for R&D since 1999; however, many Japanese companies had not used accrual manipulation even before 1999. Many companies (more than 90%) had expensed al l of R&D spending when it occurred because of tax benefits, despite the fact that they could have used accrual manipulation of R&D spending based on the existing accounting rules. Therefore, Japanese firms would seem to have, in general, used real manipulation to (A) increase or decrease R&D spending, and/or (B) to change the content of R&D to gain target results within the short-term. Using the financial data from 1980 to 2006 of Japanese electronics companies, this paper shows two kinds of evidence that managers adjusted the amount of R&D spending for all periods according to their expected income and that since 2000 they have tried to shorten the term in which the benefit of their R&D spending was realized to improve short-term performance. To determine the amount and/or the content of R&D spending for the purpose of gaining a short -term benefit can result in the loss of opportunities to gain greater long-term benefits.