The relation between innovation and earnings management : evidence for the UK

Marei, Y; Al Bahloul, M; Almasarwah, A; Alam, MA

Abstract

The purpose of this paper is to investigate whether the executives of innovative firms in the UK economy prefer to support innovation over earnings. This study uses discretionary accruals and abnormal activities as proxies for earnings management and research and development as a proxy for innovation. This study finds dissimilar results for the discretionary accrual and abnormal activity models, it conducts additional analysis that accounts for the innovation to beat the earnings group, and refers to this group as the "downward" group; another analysis accounts for the innovation to reduce earnings, and refers to this group as the "upward” group. The results suggest that there is a negative association between discretionary accruals and downward innovation and finds a similar relationship in abnormal activities and the downward group, which indicates the referential value of beating earnings over innovation. Moreover, there is a positive relationship in increased innovation, which suggests that executives prefer to support innovation when earnings are achieved or unachievable. This study also documented that innovative firms engage more in manipulation than non-innovative firms and shows that understanding executives' incentives to earn income provides better evidence on the relationship between innovation and earnings. This is the first paper that adds to the understanding of innovation by measuring using upwards and downwards incentives.

• Journal Article Type: Article
• Acceptance Date: Nov 28, 2021
• Online Publication Date: May 12, 2023
• Publication Date: May 12, 2023
• Deposit Date: Dec 1, 2021
• Publicly Available Date: May 13, 2024
• Journal: Global Business and Economics Review (GBER)
• Print ISSN: 1097-4954
• Electronic ISSN: 1745-1329
• Publisher: Inderscience
• Peer Reviewed: Peer Reviewed
• Volume: 29
• Issue: 1
• Pages: 16-40
• DOI: https://doi.org/10.1504/GBER.2023.131939
• Publisher URL: http://www.inderscience.com/jhome.php?jcode=GBER
• Related Public URLs: https://www.inderscience.com/jhome.php?jcode=gber