TY  - JOUR
AB  - Purpose 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.Design/methodology/approach 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.Findings 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.Originality/value 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.
VL  - 25
IS  - 3
SN  - 1834-7649
DO  - 10.1108/IJAIM-06-2016-0067
UR  - https://doi.org/10.1108/IJAIM-06-2016-0067
AU  - Hsiao Hsiao-Fen
AU  - Liao Szu-Lang
AU  - Su Chi-Wei
AU  - Sung Hao-Chang
PY  - 2017
Y1  - 2017/01/01
TI  - Product market competition, R&D investment choice, and real earnings management
T2  - International Journal of Accounting & Information Management
PB  - Emerald Publishing Limited
SP  - 296
EP  - 312
Y2  - 2024/04/20
ER  -