The Effect of Intangible Investment on Earnings Management in Japanese Firms—An Analysis Focused on Research and Development Investment—

Abstract

The purpose of this paper is to examine the effect of intangible investments on earnings management in Japanese finns. To this end, we hypothesize that intangible-intensive firms tend to make income-increasing accounting decision. We call this the “profit signaling hypothesis”. Alternatively, we hypothesize mat these firms tend to make income-decreasing accounting decision. We call this the “tax benefit hypothesis”. The empirical results show that managers of intangible-intensive Japanese firms tend to use negative discretionary accruals to manage reported earnings downward. Overall, we conclude that the data is ccmsistentwim the tax benefit hypothesis.