This study is an attempt to combine two important streams of accounting research: The problem of earnings management (hereafter EM) and the role of conference calls (hereafter CCs) as disclosure medium. In doing so, I focus on real activities manipulation (hereafter RM) through cutting R&D expenses. I contribute to the existing literature by answering two questions: Firstly, whether the risk of managers engaging in RM via R&D spending affects the probability of analysts, or management addressing those cuts during CCs. Secondly, if the analyst community benefits from such discussions, by obtaining useful information, not accessible via other information channels. To answer these questions, I examine the 4th quarter earnings conference call transcripts of 300 firm years with an increased RM risk. I use content analysis to measure analysts’ and managers’ reactions, and create dummy variables that contain the information found.
Table of Contents
1. Introduction
2. Literature Review
2.1. Literature on real activities manipulation
2.2. Literature on the information content of Conference Calls
3. Hypotheses Development
3.1. Discussions and inquiries about R&D cuts during Conference Calls
3.2. The information content of Conference Calls with regard to R&D cuts
4. Sample Selection
5. Definition of Variables
5.1. Variables for assessing the probabilities of inquiries and discussions
5.1.1. Definition of inquiries and discussion about R&D cuts
5.1.2. Definition of control variables
5.2. Variables for measuring the information content of R&D cuts
5.2.1. Definition of proxies for information content
5.2.2. Definition of control variables
6. Test Design
6.1. Regression models analyzing inquiries and discussions about R&D cuts
6.2. Regression models analyzing the information content of R&D cuts
7. Descriptive Statistics
7.1. Summary Statistics
7.2. Correlation Matrix
8. Results
8.1. The effect of real activities manipulation on inquiries about R&D cuts
8.2. The effect of real activities manipulation on discussions about R&D cuts
8.3. The information content of inquiries
8.4. The information content of discussing R&D cuts
9. Summary and Conclusion
Research Objectives and Focus
The primary objective of this paper is to investigate the intersection of earnings management (EM) and the role of conference calls (CCs) as a disclosure medium, specifically focusing on real activities manipulation (RM) through the reduction of R&D expenses. The research seeks to determine whether the risk of managers engaging in RM influences the probability of analysts or management addressing R&D cuts during earnings conference calls and whether such discussions provide the analyst community with incremental, valuable information.
- The relationship between real activities manipulation risk and analysts' inquiry behavior during conference calls.
- The role of conference calls as a substitute disclosure medium for R&D-related information.
- The impact of discussing R&D cuts on analyst forecast dispersion and forecast error.
- The effect of analyst coverage and management guidance on the probability of addressing R&D spending reductions.
Excerpt from the Book
1. Introduction
This study is an attempt to combine two important streams of accounting research: The problem of earnings management (hereafter EM) and the role of conference calls (hereafter CCs) as disclosure medium. In doing so, I focus on real activities manipulation (hereafter RM) through cutting R&D expenses. I contribute to the existing literature by answering two questions: Firstly, whether the risk of managers engaging in RM via R&D spending affects the probability of analysts, or management addressing those cuts during CCs. Secondly, if the analyst community benefits from such discussions, by obtaining useful information, not accessible via other information channels. To answer these questions, I examine the 4th quarter earnings conference call transcripts of 300 firm years with an increased RM risk. I use content analysis to measure analysts’ and managers’ reactions, and create dummy variables that contain the information found.
In the first part of my empirical analysis, I examine the reactions to R&D cuts, as a function of the risk of RM. To determine this risk level, I use the context of a situation in which managers have strong incentives to manipulate earnings: meeting the mean analyst forecast. I use logistic regression models to determine the effect of RM risk on the probability that analysts and managers will address the R&D cuts. My results show weak evidence that indicates a positive relation between the RM risk level and analysts’ likelihood of inquiring about R&D cuts. This result is consistent with the notion that analysts serve as monitors to the firm they cover. Managers’ reactions on the other hand, are not affected by the risk of RM. For them, the decision to address R&D spending seems to depend on whether CCs are generally their primary medium to disclose such information. This is a strong indication that CCs work as substitutes for other mediums, when it comes to disclosing information about R&D expenses.
Summary of Chapters
1. Introduction: Introduces the research scope regarding earnings management and conference calls, defining the study's core questions and methodology.
2. Literature Review: Provides a comprehensive overview of existing research on real activities manipulation and the information content of conference calls.
3. Hypotheses Development: Formulates hypotheses regarding the relationship between R&D cuts, conference call discussions, and information value to analysts.
4. Sample Selection: Details the criteria used to select 300 firm years and the subsequent data filtration process for the regression models.
5. Definition of Variables: Explains the operationalization of variables, including dummy variables for inquiries and discussions, and various control variables.
6. Test Design: Describes the logistic and linear regression models utilized to analyze the influence of RM risk and information content.
7. Descriptive Statistics: Presents the summary statistics and correlation matrices for the sample population.
8. Results: Discusses the findings from the regression analyses concerning analysts' and managers' reactions to R&D cuts and the information value of these discussions.
9. Summary and Conclusion: Summarizes the study’s findings, notes limitations, and provides an outlook for future research.
Keywords
Earnings Management, Real Activities Manipulation, R&D Expenses, Conference Calls, Analysts, Forecast Dispersion, Forecast Error, Disclosure Medium, Earnings Surprise, Monitoring Role, Information Asymmetry, Regression Analysis, Content Analysis, Corporate Governance, Financial Reporting
Frequently Asked Questions
What is the core subject of this research paper?
The paper investigates whether the risk of managers engaging in earnings management through cutting R&D expenses affects how frequently these cuts are discussed or questioned during quarterly earnings conference calls.
What are the central thematic fields covered?
The research sits at the intersection of accounting research, specifically focusing on real activities manipulation (RM), the disclosure role of corporate conference calls, and the information environment of financial analysts.
What is the primary objective or research question?
The study aims to determine if an elevated risk of RM influences analysts' or management's likelihood to address R&D cuts, and whether such discussions provide analysts with incremental information that improves their forecast accuracy.
Which scientific methods were employed?
The author uses content analysis to identify discussions of R&D cuts in conference call transcripts and applies logistic and linear regression models to test the impact of RM risk and information variables on analyst behavior and forecast precision.
What does the main body of the work treat?
The main body covers the theoretical framework, the formation of hypotheses, the methodology for selecting the sample and defining variables, the design of regression tests, and the subsequent analysis and interpretation of empirical results.
Which keywords characterize this work?
Key terms include Earnings Management, Real Activities Manipulation, R&D Expenses, Conference Calls, Analyst Forecasts, and Information Content.
How does the author define a "high risk" firm regarding real activities manipulation?
The author considers firms that only just meet or beat the mean analyst forecast to be "high risk" firms, as these managers have strong incentives to use RM to avoid missing earnings benchmarks.
Does the empirical analysis support the "substitute theory" for conference calls?
Yes, the results support the substitute theory, suggesting that conference calls often serve as an alternative medium for disclosing R&D information when other channels are limited, rather than necessarily providing new, incremental information that reduces forecast errors.
- Quote paper
- Julian Kasturiarachchige (Author), 2015, Research and Development and Earnings Management. An Empirical Analysis of Analysts’ Reactions during Conference Calls, Munich, GRIN Verlag, https://www.grin.com/document/369388
