The impact of R&D classification shifting in high-technology industries

Abstract

Purpose

This study investigates the motivations and consequences of classification shifting from cost of sales to research and development (R&D) in high-technology industries.

Design/methodology/approach

This study conducts a multivariate analysis using logistic and ordinary least squares regression methods on panel data of high-technology firms for the period 1988–2012 to examine the effect of R&D classification shifting on gross margin benchmarks and future performance.

Findings

The results show that R&D classification shifting increases the likelihood of meeting or beating gross margin benchmarks. They also show that firms engaged in R&D classification shifting exhibit lower future R&D productivity, stock returns, and operating performance. The findings indicate that the short-term benefits of achieving gross margin benchmarks are offset by the long-term negative impact of R&D misclassification.

Practical implications

This paper provides insights that can help regulators develop clearer guidelines for the appropriate classification of R&D costs.

Originality/value

Moving beyond the core earnings management paradigm, this study demonstrates the use of R&D classification shifting as a tool to manipulate gross profits and R&D in high-technology industries. Most prior studies focused on the determinants of R&D classification shifting, while few investigated the impact of the practice. The findings in this study provide initial evidence of the consequences of R&D classification shifting for future R&D productivity and firm performance in high-tech industries. Using five methods, this study also validates R&D classification shifting and addresses the alternative explanation of R&D overinvestment.

Citation

Qiao, N. (2024), "The impact of R&D classification shifting in high-technology industries", Asian Review of Accounting, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/ARA-11-2023-0326