A study on relation between accounting treatment for capitalization of r&d expenditure and earnings management in the Korean defense industry

Abstract

Overall, this paper examines and finds the relation between the ratio of accounting treatment for capitalization of research and development expenditure (RCR&D). The theoretical model derived from panel analysis resource on Korean defense industry information from 2009 to 2014 indicates that the RCR&D positively affect earnings management direction through a significantly positive relationship. Also, the effect of large defense industry firms’ RCR&D on earnings management direction is higher than that of small ones despite that large defense industry firms have discretionary accruals in (-) direction compared with small ones. In addition, the effect of defense industry firms’ RCR&D on earnings management direction is strong especially in earnings increasing group. Also the change of RCR&D is positive influence on discretionary accruals. This enforces that RCR&D can be related with earnings management direction.