Earnings management under pressure to attain an earnings benchmark: Do managers cut R&D expenditure to achieve an earnings benchmark during an accounting period?

Abstract

When companies are unlikely to achieve an earnings benchmark, it is said that managers are likely to do earnings management by cutting discretionary expenditure during an accounting period to achieve the benchmark. This paper focuses on the earnings forecasts issued by managers as a proxy for the earnings benchmark and examines a hypothesis that managers under pressure to attain the earnings benchmark reduce the discretionary expenditure during an accounting period to achieve it. Focusing on the R&D expenditure as typical discretionary expenditure, this paper provides empirical evidence that, only when the proportion of a R&D budget is over 5% of sales, managers who are faced with the pressure to attain the earnings benchmark are likely to cut the R&D expenditure.