Earnings Management and R&D Costs Capitalization: Evidence From Russian and Germany Markets

Investment Management and Financial Innovations (2016), Vol. 13, Iss. 1, p.206-214

19 Pages Posted: 5 Dec 2019

See all articles by Tatiana Garanina

Tatiana Garanina

University of Vaasa; Vaasan yliopisto (University of Vaasa)

Egor Nikulin

Saint Petersburg State University - Graduate School of Management

Oksana Frangulantc

Saint Petersburg State University

Date Written: August 27, 2015

Abstract

Purpose: The goal of the paper is to analyse the motives that determine the propensity of companies of both developed and developing countries to engage in earnings management on the basis of accounting treatment of R&D costs.

Methodology: The final sample analyzed in the paper includes 47 Russian companies and 74 German companies for the period 2012-2013. The econometric models are tested with the help of Stata.

Findings: The results of the research show that managers of companies in Russia and in Germany are engaged in earnings management practices using R&D costs. But the incentives for these actions are different. In case of Russian companies managers enjoy the discretion in accounting choices when trying to meet debt covenants by adopting those methods that increase financial results. German managers are focused more on the other type of earnings management incentives – earnings smoothing. There is evidence that the amount of capitalized R&D costs in German companies increases when financial results vary more.

Value: There is some evidence in favor of presence of earnings management incentives in the decision to capitalize R&D costs on developed markets. But this problem is almost not studied in the developing markets and there is no comparison between the practices of developed and developing countries in the field. In this paper we strive to test the assumption that the contextual factors on developed and developing markets can differ, and thus they may provide different incentives for earnings management on the basis of R&D costs.

Keywords: earnings management, R&D costs, Russia, Germany, income smoothing, debt covenants

JEL Classification: M10, M41

Suggested Citation

Garanina, Tatiana and Garanina, Tatiana and Nikulin, Egor and Frangulantc, Oksana, Earnings Management and R&D Costs Capitalization: Evidence From Russian and Germany Markets (August 27, 2015). Investment Management and Financial Innovations (2016), Vol. 13, Iss. 1, p.206-214 , Available at SSRN: https://ssrn.com/abstract=3490568

Tatiana Garanina (Contact Author)

University of Vaasa ( email )

P.O. Box 700
Wolffintie 34
Vaasa, FI-65101
Finland

Vaasan yliopisto (University of Vaasa) ( email )

P.O. Box 700
P.O. Box 700
Vaasa, FI-65101
Finland

Egor Nikulin

Saint Petersburg State University - Graduate School of Management ( email )

Volkhovsky Per. 3
St. Petersburg, 199004
Russia

Oksana Frangulantc

Saint Petersburg State University ( email )

7-9, Universitetskaya nab.
Saint Petersburg, 199034
Russia

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