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Product market competition, R&D investment choice, and real earnings management

Hsiao-Fen Hsiao (Department of Accounting, Ningbo University, Ningbo City, China)
Szu-Lang Liao (Department of Money and Banking, National Chengchi University, Taipei, China)
Chi-Wei Su (Department of Finance, Ocean University of China, Qingdao, China)
Hao-Chang Sung (Department of Finance, College of Economics, Jinan University, Guangzhou, China)

International Journal of Accounting & Information Management

ISSN: 1834-7649

Article publication date: 7 August 2017



Recent studies in the accounting literature have investigated the economic consequences of R&D capitalization. Discretionary R&D capitalization for target beating can be characterized as a firm signaling private information on its future economic benefits or as opportunistic earnings management. R&D capitalization also has an impact on a firm’s marginal costs and product market competition. The purpose of this paper is to address how firms choose R&D levels for the purpose of meeting or beating their earnings targets and how this influences sequential product market competition.


The authors study this issue in a stylized game-theoretic model where R&D choices of a firm are not only strategically made but also used to convey proprietary information to its rival. The model provides a rationale for a firm distorting its R&D level to earn more profits and meet its earnings target.


The equilibrium result indicates that before the realization of common cost shock, a firm can influence the output of its accounting system (i.e. meeting an earnings target) through adjusting its R&D choices. This firm will overinvest in R&D, and this will give an opportunity to create some reserves to be used later to earn a higher profit and reach the earnings target.


This paper contributes to the research on real earnings management in terms of how R&D capitalization affects a firm’s R&D choices by influencing the output of its accounting system through adjusting its R&D choices and the strategic impact of those choices.



The authors acknowledge National Social Science Foundation of China under Grant (grant #15BJY011).


Hsiao, H.-F., Liao, S.-L., Su, C.-W. and Sung, H.-C. (2017), "Product market competition, R&D investment choice, and real earnings management", International Journal of Accounting & Information Management, Vol. 25 No. 3, pp. 296-312.



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