IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v14y2022i15p9048-d870003.html
   My bibliography  Save this article

Accounting Conservatism, R&D Manipulation, and Corporate Innovation: Evidence from China

Author

Listed:
  • Yi Shen

    (School of Economics and Management, Tongji University, Shanghai 200092, China)

  • Qingsong Ruan

    (School of Economics and Management, Tongji University, Shanghai 200092, China)

Abstract

Research and development (R&D) is the main driver for the sustainable development of corporate innovation. Given the prevalence of information asymmetry in R&D, executives opportunistically manipulate R&D investment. While accounting conservatism as a corporate governance mechanism can effectively reduce information asymmetry, few studies have focused on the relationship between the two. Based on Chinese listed companies in 2008–2019, this paper investigates the impact of accounting conservatism on R&D manipulation, as well as the moderating effect of internal control quality and tax enforcement efforts on this relationship. The results indicate that not only are the results more significantly negative in subgroups of low-level internal control and tax collection, but the coefficients of their cross-sectional variables are also positive. Therefore, accounting conservatism can effectively deter R&D manipulation, and this effect is weakened by internal control and tax enforcement. Additionally, the impact of accounting conservatism on manipulation differs in direction and lifecycle. The negative conservatism–manipulation relationship is more significant for upward manipulation and growing enterprises. Further research also suggests that conservatism’s inhibitory effect on R&D manipulation is mediated by financial constraints, which enhances corporate innovation efficiency. The conclusions not only provide empirical evidence for the corporation to improve R&D efficiency but also provide the basis for the authorities to promote innovation supervision.

Suggested Citation

  • Yi Shen & Qingsong Ruan, 2022. "Accounting Conservatism, R&D Manipulation, and Corporate Innovation: Evidence from China," Sustainability, MDPI, vol. 14(15), pages 1-25, July.
    • Handle: RePEc:gam:jsusta:v:14:y:2022:i:15:p:9048-:d:870003
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/14/15/9048/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2071-1050/14/15/9048/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Kravet, Todd D., 2014. "Accounting conservatism and managerial risk-taking: Corporate acquisitions," Journal of Accounting and Economics, Elsevier, vol. 57(2), pages 218-240.
    2. Steven N. Kaplan & Luigi Zingales, 1995. "Do Financing Constraints Explain Why Investment is Correlated with Cash Flow?," NBER Working Papers 5267, National Bureau of Economic Research, Inc.
    3. Ximing Yin & Ben-lu Hai & Jin Chen, 2019. "Financial Constraints and R&D Investment: The Moderating Role of CEO Characteristics," Sustainability, MDPI, vol. 11(15), pages 1-18, August.
    4. Ruch, George W. & Taylor, Gary, 2015. "Accounting conservatism: A review of the literature," Journal of Accounting Literature, Elsevier, vol. 34(C), pages 17-38.
    5. Mohamed Arouri & Guillaume Pijourlet, 2017. "CSR Performance and the Value of Cash Holdings: International Evidence," Journal of Business Ethics, Springer, vol. 140(2), pages 263-284, January.
    6. Armen Hovakimian & Gayané Hovakimian, 2009. "Cash Flow Sensitivity of Investment," European Financial Management, European Financial Management Association, vol. 15(1), pages 47-65, January.
    7. Cătălina Silvia Crișan-Mitra & Liana Stanca & Dan-Cristian Dabija, 2020. "Corporate Social Performance: An Assessment Model on an Emerging Market," Sustainability, MDPI, vol. 12(10), pages 1-21, May.
    8. Akram Khalilov & Beatriz Garcia Osma, 2020. "Accounting conservatism and the profitability of corporate insiders," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(3-4), pages 333-364, March.
    9. Shlomo Mizrahi & Yizhaq Minchuk, 2017. "Performance Management in a Decentralized Setting: Monitoring and Gaming in the Financial Services Industry," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 38(6), pages 742-753, September.
    10. Guo, Jun & Huang, Pinghsun & Zhang, Yan, 2020. "Accounting conservatism and corporate social responsibility," Advances in accounting, Elsevier, vol. 51(C).
    11. Wenyan Sun & Kedong Yin & Zhe Liu, 2021. "Tax Incentives, R&D Manipulation, and Corporate Innovation Performance: Evidence from Listed Companies in China," Sustainability, MDPI, vol. 13(21), pages 1-16, October.
    12. Khan, Mozaffar & Watts, Ross L., 2009. "Estimation and empirical properties of a firm-year measure of accounting conservatism," Journal of Accounting and Economics, Elsevier, vol. 48(2-3), pages 132-150, December.
    13. Anagnostopoulou, Seraina C. & Tsekrekos, Andrianos E. & Voulgaris, Georgios, 2021. "Accounting conservatism and corporate social responsibility," The British Accounting Review, Elsevier, vol. 53(4).
    14. Wesley M. Cohen & Richard R. Nelson & John P. Walsh, 2000. "Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not)," NBER Working Papers 7552, National Bureau of Economic Research, Inc.
    15. Hu, Jinshuai & Li, Annie Yuansha & Zhang, Feida (Frank), 2014. "Does accounting conservatism improve the corporate information environment?," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 23(1), pages 32-43.
    16. Basu, Sudipta, 1997. "The conservatism principle and the asymmetric timeliness of earnings," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 3-37, December.
    17. Cheng Lu & Lanfeng Kao & Anlin Chen, 2012. "The effects of R&D, venture capital, and technology on the underpricing of IPOs in Taiwan," Review of Quantitative Finance and Accounting, Springer, vol. 39(4), pages 423-445, November.
    18. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, vol. 26(1), pages 3-27, July.
    19. Weidong Zhang & Pengbo Hu & Jenny J. Wang & Zeyu Li & Hongrui Zheng & Xue Gao, 2022. "Equity incentive plans and R&D investment manipulation: evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(3), pages 4157-4183, September.
    20. Ball, Ray & Shivakumar, Lakshmanan, 2005. "Earnings quality in UK private firms: comparative loss recognition timeliness," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 83-128, February.
    21. Chen, Shawn Xiaoguang, 2017. "The effect of a fiscal squeeze on tax enforcement: Evidence from a natural experiment in China," Journal of Public Economics, Elsevier, vol. 147(C), pages 62-76.
    22. Li, Zhe & Wang, Bo & Wu, Tianlong & Zhou, Dan, 2021. "The influence of qualified foreign institutional investors on internal control quality: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 78(C).
    23. Elias Steinmüller & Georg U. Thunecke & Georg Wamser, 2019. "Corporate income taxes around the world: a survey on forward-looking tax measures and two applications," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(2), pages 418-456, April.
    24. Katherine A. Gunny, 2010. "The Relation Between Earnings Management Using Real Activities Manipulation and Future Performance: Evidence from Meeting Earnings Benchmarks," Contemporary Accounting Research, John Wiley & Sons, vol. 27(3), pages 855-888, September.
    25. Lin, Fengyi & Wu, Chung-Min & Fang, Tzu-Yi & Wun, Jheng-Ci, 2014. "The relations among accounting conservatism, institutional investors and earnings manipulation," Economic Modelling, Elsevier, vol. 37(C), pages 164-174.
    26. Basse Mama, Houdou, 2018. "Innovative efficiency and stock returns: Should we care about nonlinearity?," Finance Research Letters, Elsevier, vol. 24(C), pages 81-89.
    27. Karthik Balakrishnan & Ross Watts & Luo Zuo, 2016. "The Effect of Accounting Conservatism on Corporate Investment during the Global Financial Crisis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 43(5-6), pages 513-542, May.
    28. Sheng-Syan Chen & Keng-Yu Ho & Po-Hsin Ho, 2014. "CEO Overconfidence and Long-Term Performance Following R&D Increases," Financial Management, Financial Management Association International, vol. 43(2), pages 245-269, June.
    29. Giulio Cainelli & Rinaldo Evangelista & Maria Savona, 2006. "Innovation and economic performance in services: a firm-level analysis," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 30(3), pages 435-458, May.
    30. Khurana, Inder K. & Pereira, Raynolde & Martin, Xiumin, 2006. "Firm Growth and Disclosure: An Empirical Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(2), pages 357-380, June.
    31. Gayané Hovakimian, 2009. "Determinants of Investment Cash Flow Sensitivity," Financial Management, Financial Management Association International, vol. 38(1), pages 161-183, March.
    32. Brennan, Niamh M., 2021. "Connecting earnings management to the real World:What happens in the black box of the boardroom?," The British Accounting Review, Elsevier, vol. 53(6).
    33. George Lăzăroiu & Luminița Ionescu & Mihai Andronie & Irina Dijmărescu, 2020. "Sustainability Management and Performance in the Urban Corporate Economy: A Systematic Literature Review," Sustainability, MDPI, vol. 12(18), pages 1-13, September.
    34. Meysam Bolgorian & Ali Mayeli, 2020. "Accounting conservatism and money laundering risk," Accounting Research Journal, Emerald Group Publishing Limited, vol. 33(2), pages 343-361, February.
    35. Bing Wang & Yuedong Li & Wenshuang Xuan & Yihan Wang, 2022. "Internal Control, Political Connection, and Executive Corruption," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 58(2), pages 311-328, January.
    36. García Lara, Juan Manuel & García Osma, Beatriz & Penalva, Fernando, 2016. "Accounting conservatism and firm investment efficiency," Journal of Accounting and Economics, Elsevier, vol. 61(1), pages 221-238.
    37. Tami Dinh & Helen Kang & Wolfgang Schultze, 2016. "Capitalizing Research & Development: Signaling or Earnings Management?," European Accounting Review, Taylor & Francis Journals, vol. 25(2), pages 373-401, June.
    38. Gilliam, Thomas A. & Heflin, Frank & Paterson, Jeffrey S., 2015. "Evidence that the zero-earnings discontinuity has disappeared," Journal of Accounting and Economics, Elsevier, vol. 60(1), pages 117-132.
    39. Laux, Volker & Ray, Korok, 2020. "Effects of accounting conservatism on investment efficiency and innovation," Journal of Accounting and Economics, Elsevier, vol. 70(1).
    40. James R. Brown & Steven M. Fazzari & Bruce C. Petersen, 2009. "Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom," Journal of Finance, American Finance Association, vol. 64(1), pages 151-185, February.
    41. Laurel A. Franzen & Kimberly J. Rodgers & Timothy T. Simin, 2007. "Measuring Distress Risk: The Effect of R&D Intensity," Journal of Finance, American Finance Association, vol. 62(6), pages 2931-2967, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zhou, Zhongsheng & Li, Zhuo & Du, Shanzhong & Cao, June, 2024. "Robot adoption and enterprise R&D manipulation: Evidence from China," Technological Forecasting and Social Change, Elsevier, vol. 200(C).
    2. Guanwei Liu, 2024. "Accounting Conservatism and Corporate Governance: An Examination of the Influence on Financial Reporting Quality and Stakeholder Trust," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 8(3), pages 2158-2175, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Anagnostopoulou, Seraina C. & Tsekrekos, Andrianos E. & Voulgaris, Georgios, 2021. "Accounting conservatism and corporate social responsibility," The British Accounting Review, Elsevier, vol. 53(4).
    2. Garanina, Tatiana & Kim, Oksana, 2023. "The relationship between CSR disclosure and accounting conservatism: The role of state ownership," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 50(C).
    3. Vasicek, Davor & Cicak, Josip, 2019. "Back To The Core: Alternative Performance Measurement," UTMS Journal of Economics, University of Tourism and Management, Skopje, Macedonia, vol. 10(2), pages 237-247.
    4. Čičak Josip & Vašiček Davor, 2019. "Determining the Level of Accounting Conservatism through the Fuzzy Logic System," Business Systems Research, Sciendo, vol. 10(1), pages 88-101, April.
    5. Tri Tri Nguyen & Chau Minh Duong & Nguyet Thi Minh Nguyen & Hung Quang Bui, 2020. "Accounting conservatism and banking expertise on board of directors," Review of Quantitative Finance and Accounting, Springer, vol. 55(2), pages 501-539, August.
    6. Bo-Hung Chiou & Shen-Ho Chang, 2020. "Influence of Investment Efficiency by Managers and Accounting Conservatism on Idiosyncratic Risks to Investors," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 10(1), pages 1-8.
    7. Joohyung Ha, 2021. "Bank accounting conservatism and bank loan quality," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(3-4), pages 498-532, March.
    8. Gerald J. Lobo & Ashok Robin & Kean Wu, 2020. "Share repurchases and accounting conservatism," Review of Quantitative Finance and Accounting, Springer, vol. 54(2), pages 699-733, February.
    9. Dan Zhang & Shiguang Ma & Xiaofei Pan, 2023. "How do institutional investors influence accounting conservatism in China?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(S2), pages 2719-2754, June.
    10. Fu, Zheng & Ma, Yechi & Li, Suyang & Qiao, Lu, 2023. "Peer performance and the asymmetric timeliness of earnings recognition," International Review of Financial Analysis, Elsevier, vol. 85(C).
    11. Umair Bhutta & Jéssica Nunes Martins & Mário Nuno Mata & Ali Raza & Rui Miguel Dantas & Anabela Batista Correia & Muhammad Rafiq, 2021. "Intellectual Structure and Evolution of Accounting Conservatism Research: Past Trends and Future Research Suggestions," IJFS, MDPI, vol. 9(3), pages 1-13, June.
    12. Biehl, Henrike & Bleibtreu, Christopher & Stefani, Ulrike, 2024. "The real effects of financial reporting: Evidence and suggestions for future research," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 54(C).
    13. Shankar Shaw, Tara & Raithatha, Mehul & Krishnan, Gopal V. & Cordeiro, James J., 2021. "Did mandatory CSR compliance impact accounting Conservatism? Evidence from the Indian Companies Act 2013," Journal of Contemporary Accounting and Economics, Elsevier, vol. 17(3).
    14. Chen-Yin Kuo, 2018. "Does Accounting Conservatism Reduce Default Risk? Evidence from Taiwan," International Journal of Economics and Financial Issues, Econjournals, vol. 8(4), pages 227-242.
    15. Kim, Jaewoo, 2018. "Asymmetric timely loss recognition, adverse shocks to external capital, and underinvestment: Evidence from the collapse of the junk bond market," Journal of Accounting and Economics, Elsevier, vol. 65(1), pages 148-168.
    16. Sai Ding & Alessandra Guariglia & John Knight & Junhong Yang, 2021. "Negative Investment in China: Financing Constraints and Restructuring versus Growth," Economic Development and Cultural Change, University of Chicago Press, vol. 69(4), pages 1411-1449.
    17. Loureiro, Gilberto & Silva, Sónia, 2022. "Earnings management and stock price crashes post U.S. cross-delistings," International Review of Financial Analysis, Elsevier, vol. 82(C).
    18. Liu, Sun & Zhang, Jie, 2023. "Conditional conservatism and investment efficiency under a state ownership environment: Further evidence from China," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 53(C).
    19. Chen-Yin Kuo, 2018. "Are the forecast errors of stock prices related to the degree of accounting conservatism?," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 8(6), pages 1-9.
    20. Matthias Breuer & David Windisch, 2019. "Investment Dynamics and Earnings‐Return Properties: A Structural Approach," Journal of Accounting Research, Wiley Blackwell, vol. 57(3), pages 639-674, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jsusta:v:14:y:2022:i:15:p:9048-:d:870003. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.