How does the real earnings management affect firms innovative? Evidence from US firms

Purpose The purpose of this paper is to examine the effect of R&D intensity on the real earnings management index. Design/methodology/approach The authors proceed with dividing the full sample into two sub-samples, in accordance with the R&D associated intensity median. The final test sample proves to involve 73 firms along with 949 relating observations, while the control sample appears to enclose 65 firms and 845 relevant observations for the period 2000-2012. Findings The main finding of this study is the great influence of R&D intensity on the real earnings management index on the test sample. Accordingly, the proposed hypothesis stipulating that the innovative firms engage in upward real earnings management turns out to be strongly supported. Research limitations/implications The study was conducted using robust methods to test the effect of R&D intensity on the real earnings management index. The generalized least squares method was used to fit panel data and overcome heteroscedasticity and autocorrelation problems. The aim of the study was to prove the great effect of R&D intensity on the real earnings management index. As this study was based on data from American companies, the results cannot be generalized to all contexts. Originality/value This paper differs from previous work and tests the effect of innovative firms, the market-to-book ratio on real earnings management. The findings of this study will enrich the literature on real earnings management by suggesting R&D intensity that can significantly enhance the real earnings management index. Therefore, these findings will be helpful to investors, managers and regulators because they have implications for the interactive decision-making process.