Earnings management and R&D costs capitalization: evidence from Russian and German markets

Purpose: The goal of the paper is to analyze the motives that determine the propensity of companies in both developed and developing countries to engage in earnings management on the basis of accounting treatment of R&D costs.
Methodology: The final sample analyzed in the paper is 47 Russian companies and 74 German companies for the period 2012-2013.
Findings: The results of the research show that managers of companies in Russia and in Germany are engaged in earnings management practices using R&D costs, although the incentives for these actions are different. In the case of Russian companies, managers enjoy discretion in accounting choices when trying to meet debt covenants by adopting those methods that increase financial results. German managers are focused more on the other type of earnings management incentives – earnings smoothing. There is evidence that the amount of capitalized R&D costs in German companies increases when financial results vary more.
Value: There is some evidence in favor of the presence of earnings management incentives in the decision to capitalize R&D costs in developed markets. However, this problem has rarely been studied in developing markets, and there is no comparison between the practices of developed and developing countries in the field. In this paper authors attempt to test the assumption that the contextual factors in developed and developing markets can differ, and thus they may provide different incentives for earnings management on the basis of R&D costs