The relation between innovation and earnings management: evidence for the UK
by Yahya Marei; Mohammad Al Bahloul; Adel Almasarwah; Ashraful Alam
Global Business and Economics Review (GBER), Vol. 29, No. 1, 2023

Abstract: This paper seeks to investigate the potential utilisation of research and development expenses by executives of innovative firms in the UK economy as a means of manipulating financial statement users. This study uses discretionary accruals and abnormal activities as proxies for earnings management and research and development as a proxy for innovation. This study finds dissimilar results for the discretionary accrual and abnormal activity models, it conducts additional analysis that accounts for the innovation to beat the earnings group, and refers to this group as the 'downward' group; another analysis accounts for the innovation to reduce earnings, and refers to this group as the 'upward' group. The results suggest that there is a negative association between discretionary accruals and downward innovation and finds a similar relationship in abnormal activities and the downward group, which indicates the referential value of beating earnings over innovation. This study also documented that innovative firms engage more in manipulation than non-innovative firms.

Online publication date: Wed, 05-Jul-2023

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