Accounting treatment of R&D expenditures and earnings management: an empirical study on French listed companies

Accounting treatment of Research and Development (R&D) expenditures is a controversial issue since the way of taking into account these expenditures can sometimes be motivated by incentives to manage earnings. This paper aims to examine the extent to which the decision of French companies to capitalize or not the expenditures of R&D can be motivated by earnings management incentives. The French context presents a relevant example to check our assumptions, as the GAAP in France offers the ability to choose between capitalizations and expensing R& D expenditures. Using a logistic regression model to test the effects on the probability of capitalizing R&D expenditures of three main incentives for earnings management (earnings smoothing, the reduction of political costs and the bonus plans) and six other control variables (size of the company, industry, quality of audit, listing on US stock market, profitability and risk), the results show that the French listed companies tend to use the capitalization of the R&D expenditures in order to smooth the results, as well as, to avoid any violation of the debt’s restrictive clauses.