R&D expenditures and earnings management: Evidence from Eurozone countries in crisis

This paper aims to investigate whether a firm's behaviour regarding earnings manipulation through cuts in research and development (R&D) expenditures is affected by the crisis in Eurozone countries. More specifically, this research focuses on understanding whether firms operating in an environment with distinct country characteristics and a single currency perceive earnings manipulation through R&D cuts as a means to avoid reporting earnings losses or earnings decreases, and whether the existence of a recession can impact this behaviour. Our approach design is based on a modified Bushee (1998) methodological rationale introducing both the recession impact in the form of intercept variables and a series of control variables to ensure robustness. The sample used for the analysis consists of listed Eurozone firms for a period extending from 2005 to 2013. The findings are consistent with previous literature regarding the existence of earnings manipulation through R&D cuts. Moreover, the evidence provided suggests that Eurozone firms cut R&D to avoid reporting earnings losses or decreases, even when operating in a recessive environment.