Seraina C. Anagnostopoulou

R&D expenses and firm valuation: a literature review

Purpose - The purpose of this paper is to provide a comprehensive review of the literature on R&D expenses and subsequent firm valuation and to briefly highlight some gaps and implications for future research. Design/methodology/approach - The approach is a review of studies on R&D and valuation between 1978 and 2007. The valuation issues have been grouped into general topics identified among the overall volume of research: economic characteristics, actual and forecast firm performance, capital structure, risk, and other topics which do not fit into the previous categories. Findings - The paper provides a comprehensive assessment of the literature findings on a variation of valuation topics useful for internal and external users of financial statements of firms intensive in R&D investments. It sheds light on certain literature limitations and thus guides the users of financial statements regarding to which issues they should pay attention when analysing the financial statements of firms intensive in R&D. Research limitations/implications - Existing research on R&D and valuation focuses mainly on the USA and UK and therefore raises issues of generalisation of the results. Practical implications - The paper provides a useful guide for the users of financial statements of R&D intensive firms, since it provides information on possible consequences of these expenses regarding a variety of valuation issues. Originality/value - The paper fills an information gap by addressing a range of valuation issues on R&D and offers relevant information guidance to the users of financial statements.

Accrual-Based and Real Earnings Management before and after IFRS Adoption: The Case of Greece

Purpose - – The purpose of this study is to examine the use of accrual-based vs real earnings management (EM) by Greek firms, before and after the mandatory adoption of International Financial Reporting Standards (IFRS). The research is motivated by the fact that past studies have indicated the existence of significant levels of EM for Greece in particular before IFRS. Design/methodology/approach - – Accrual-based earnings management (AEM) is examined by assessing performance-adjusted discretionary accruals, while real earnings management (REM) is defined in terms of abnormal levels of production costs, discretionary expenses, and cash flows from operations, for a three-year period before and after the adoption of IFRS in 2005. Findings - – The authors find evidence on a statistically significant shift from AEM to REM after the adoption of IFRS, indicating the replacement of one form of EM with the other. Research limitations/implications - – The validity of the results depends on the ability of the empirical models used to efficiently capture the existence of AEM and REM. Practical implications - – IFRS adoption aims to improve accounting quality, especially in countries with high need for such an improvement; however, the tendency to substitute one form of EM with another highlights unintended consequences of IFRS adoption, which do not improve the informational content of financial statements if EM continues under different forms. Originality/value - – Under the expectation that IFRS adoption should lead to improvements in accounting quality, this study examines whether IFRS actually led to a reduction of EM practices for a country with exceptionally high levels of EM before IFRS, by accounting for all possible forms of EM.

The effect of financial leverage on real and accrual-based earnings management

Past research has documented a substitution effect between real earnings management (RM) and accrual-based earnings management (AM), depending on relative costs. This study contributes to this research by examining whether levels of (and changes in) financial leverage have an impact on this empirically documented trade-off. We hypothesise that in the presence of high leverage, firms that engage in earnings manipulation tactics will exhibit a preference for RM due to a lower possibility – and subsequent costs – of getting caught. We show that leverage levels and increases positively and significantly affect upward RM, with no significant effect on income-increasing AM, while our findings point towards a complementarity effect between unexpected levels of RM and AM for firms with very high leverage levels and changes. This is interpreted as an indication that high leverage could attract heavy outsider scrutiny, making it necessary for firms to use both forms of earnings management in order to achieve earnings targets. Furthermore, we document that equity investors exhibit a significantly stronger penalising reaction to AM vs. RM, indicating that leverage-induced RM is not as easily detectable by market participants as debt-induced AM, despite the fact that the former could imply deviation from optimal business practices.

Tax Incentives as Determinants of Accounting for and Spending on R&D: An International Analysis

This article is an investigation of the conundrum of firms whose tax-minimising incentives should result in lower reported income by expensing R&D, while their financial reporting ones should result in higher reported income by capitalising R&D. Tax incentives for R&D help align those goals when accounting regulation permits the capitalisation of R&D. We use firms listed in the UK, France, Germany, Italy, Spain, and the Netherlands reporting under IFRS, and find that R&D-related tax benefits at the country level induce firms to at least partly capitalize, rather than expense R&D. Our results also indicate that country-specific R&D tax benefits provide significant incentives for increasing R&D expenditures, especially among high R&D spenders. Our findings are indicative of the influence of R&D tax incentives on accounting policies, well and above the amount of investments they are meant to induce.

Cash Holdings: Determinants and Impact on Future Operating Performance for Listed vs. Unlisted Firms

Research suggests that the cash ratios of private firms are lower than the ones of public firms, which is not consistent with an expectation for increased importance of the precautionary motive for firms with fewer funding options. The study provides a significant explanation on these lower ratios, attributed to differences in leverage, capital expenditures, internally generated cash flows, and corporate governance. The study finally testifies that excess cash holdings are positively associated with future operating performance for private, but not public firms, a finding which is interpreted as a manifestation of capital raising constraints for unlisted vs. listed firms.

Analyst Forecast Dispersion, R&D and Stock Returns: Evidence from the Uk

Existing literature has documented that research and development (R&D) expenses have a statistically significant influence on subsequent stock returns, and that R&D-intensive firms are characterized by significant excess risk-adjusted market returns. The study examines whether these R&D-related effects on returns are robust with regards to controlling for analyst forecast dispersion, decomposed into a pure lack of consensus and a forecast uncertainty component, according to Barron, Kim, Lim, and Stevens (1998). Information received from R&D expenses is expected to be non-exhaustive of the risk and uncertainty arising from R&D investments, regarding the future economic performance of R&D-intensive firms. This is first because of a mismatch between expected future costs and benefits of R&D, due to the expensing of such costs. In addition, R&D investments are inherently characterized by a very high uncertainty of future benefits. Thus, controlling for forecast uncertainty and consensus is considered necessary because these analyst forecast characteristics are expected to capture additional R&D-related economic information with a possibility to affect stock returns, compared to R&D expenses. At the same time, forecast dispersion and/or its components per se have been significantly associated with stock returns as well. The study documents that significant excess returns of R&D-intensive firms observed by prior literature generally disappear upon controlling for forecast uncertainty and lack of consensus. The study contributes to prior literature by providing, for the first time, evidence that significant excess returns for R&D-intensive firms no longer exist, upon implementing more controls for R&D-related information deficiencies.