Real Earnings Management and Narrative R&D Disclosures

초록

[Purpose] This study examines whether real earnings management (REM) influences firms’narrative R&D disclosures. Specifically, we investigate whether firms that reduce discretionary R&D expenses to manage earnings adjust the quantity of R&D information in 10－K filings to obscure their opportunistic financial reporting. [Methodology] Using a sample of U.S. listed firms from 1996 to 2020, we follow Vorst (2016) to construct a REM measure based on the subsequent reversal of R&D cuts. We measure narrative R&D disclosure by counting R&D－related sentences in the full 10－K filings and the MD&A sections. [Findings] Our results show that REM firms tend to increase R&D－related information in their 10－Ks and MD&A sections. The effect is more pronounced for f irms with greater product market competition, information demand, and external financing needs. Despite reducing actual R&D spending, REM firms appear to use R&D disclosures to enhance stakeholder perceptions of their long－term value. [Implications] This study contributes to the literature on R&D disclosures by identifying REM as a determinant. While prior research has focused on the informativeness of R&D disclosures, we highlight a potential downside of REM on corporate disclosure practice, offering valuable insights for financial statement users and regulators.

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