Abstract

۱٫ Introduction

۲٫ R&D Accounting in China

۳٫ Theoretical Analysis and Hypothesis Development

۴٫ Research Methodology

۵٫ Empirical Tests and Analysis of Results

۶٫ Conclusions

Acknowledgments

References

Abstract

     This study investigates the relationship between earnings management (EM) and capitalization of research and development (R&D) expenditure from the perspective of major shareholders expropriation, using Modified Jones Model and Bidirectional Fixed Effect Model for the period 2009–۲۰۱۸٫ And the study further discusses the moderating effect of ownership concentration on the relationship between earnings management (EM) and capitalization of research and development (R&D) expenditure. Our results confirm that the level of accrued earnings management (EM) presents a positive impact on capitalization of research and development (R&D) expenditure. The effect of the shareholding ratio of the biggest shareholder on the relationship between accrued EM and capitalization of R&D expenditure is inverted U-shape.

Introduction

     In corporate governance, with the increasing prevalence of high ownership concentration, the analysis of the role of major shareholders is gaining attractive. The main contradiction of corporate governance has also changed from the principal-agent issue between shareholders and managers to the conflict between major and minority shareholders. The major shareholders have the capability and inclination to make use of the advantage to empty the listed company and encroach on the interests of the company, thus harming the interests of the minority shareholders. The development of China’s capital market is relatively backward, and the special background results in a “one dominant share” phenomenon of enterprises in China. Shleifer and Vishny (1997) found that in countries where investor protection is insufficient, major shareholders tend to seize the interests of minority shareholders. In generally, the encroachment of major shareholders is mainly due to three reasons: high level of ownership concentration, insufficient supervision and restriction on the behavior of major shareholders, and inadequate legal protection for investors. The main ways of major shareholders’ expropriation include the direct and indirect occupation of resources, such as earnings management (EM), related party transactions and dividend distribution, etc. Xu, Huang, and Wang (2014) believes that the absolute right of controlling shareholders improves the probability of financial fraud and earnings management (EM). LaPorta et al. (2000) found that major shareholders in the absolute controlling position would obtain private benefits through related party transactions, accrued EM, and other ways to realize the interest expropriation of minority shareholders. Morck, Shleifer, and Vishny (1988) argued that the inconsistent interests of major shareholders and minority shareholders led to conflicts between them. In the absence of an effective supervision mechanism, major shareholders would use their control right over the company for their personal gains, which would harm the interests of minority shareholders.

Conclusions

     The expropriation of major shareholder has a negative effect on the quality of accounting information which will affect the decision making of users, but also restricts the healthy development of the capital market. Recently, the capitalization of R&D expenditure has been used as a means of major shareholder expropriation. Therefore, it is worthy to examine the relationship between accrued EM and capitalization of R&D expenditure from the perspective of major shareholder expropriation. And we also proposed that ownership concentration plays a moderating effect role in the study. The empirical analyses show that: (1) accrued EM has a positive effect on the amount of capitalized development expenditures. (2) the effect of ownership concentration is inverted U-shape in the relationship between accrued EM and capitalization of R&D expenditure. What’s more, endogeneity test and robustness test were carried out in this paper to verify the reliability of the finding.

     The policy implications run as follows. After the accounting standard of Intangible assets changed in 2006, China’s R&D investments have enjoyed rapid and vigorous development. Thus, the favorable policy for R&D investments creates a positive environment for the development of enterprise innovation. However, we should mention that the capitalization of R&D has not received enough attention in the accounting literature. Irrational capitalization of R&D expenditure is becoming a way for the management to manipulate the earnings and the main reason for that is the current accounting standards are not clear on the division of the research stage and the development stage, as well as the capitalization amount. Over-capitalization of R&D expenditures can lead to overinvestment in continuing projects and destroy the firm value. Therefore, the standard-setting body should improve and refine the existing provisions of R&D expenditure and reduce the space for earnings management through capitalization of R&D expenditure.