R&D Strategy, Performance and Earnings Management

Abstract

The current paper studies the determinants of R&D strategy and analyzes the effects of R&D decentralization on financial performance and earnings management. We use a sample of 160 U.S. Multinational companies (MNCs) between 2001 and 2006. Our results provide evidence that MNCs decentralize their R&D to improve firm profitability but mangers can take advantages to get some private and non transferable benefits which increases earnings management. Moreover, it seems that the presence of institutional investors and the use of performance-based compensation encourage managers to decentralize their R&D to increase earnings management.