Real Earnings Management and Narrative R&D Disclosures

Key Points

• This research analyzes the impact of real earnings management on corporate R&D disclosures. It investigates if firms reduce discretionary R&D expenses and adjust the level of related disclosures to conceal such actions.
• Analyzed data from publicly traded companies in the U.S. from 1996 to 2020 using Vorst (2016) methodology.
• Used regression analysis to empirically examine the adjustment of R&D disclosure levels based on discretionary R&D expense reductions.
• Measured R&D disclosure levels by counting R&D-related sentences in business reports and MD&A sections.
• Companies that reduced R&D expenses to manage earnings increased their R&D disclosure levels.
• This behavior was more pronounced in firms facing intense product market competition and having high information demand from investors.
• The findings suggest that managers strategically use R&D disclosures to mask real earnings management, particularly in environments where external stakeholders prioritize long-term growth perception.