||Financing Constraint, Earnings Management Strategies, and Patent Investment Strategies
||Department of Accountancy
Accrual Earnings Management
Real Earnings Management
This paper examines how financial constraint and earnings quality affect innovation strategies. Previous literatures document that earnings management mainly affects accounting information quality. Financial constraint may motivate managers to manage earnings. Managing earnings for reducing the earnings volatility demonstrates that firms have ability for supporting their regular activities and attract external funding opportunities. Cohen and Zarowin (2010) indicate that conducting real earnings management can avoid the outside monitoring mechanism, but increase cash flow inconsistency. In contrast, conducting accrual based earnings management can avoid cash flow inconsistency, but increase the possibility detection of outside monitoring mechanism. We argue that the executives of managers will consider financial constraint and the innovation strategies, when they choose different earnings management strategies. Our findings imply that financial constraint and innovation investment strategies are the main factors for selection of earnings management strategies. Conducting patent purchasing activities have less sensitive on cash flow consistency. Therefore, when firms have financial constraint, avoiding the detection from outside monitoring mechanism is the primary concern by conducting real earnings management activities. However, when firms have financial constraint and high in-house patenting activities, the concern of avoiding the detection from outside will force the executives to conduct real earnings management activities for misleading investors’ expectation. But those may also consider accrual earnings management activities for avoiding cash flow inconsistency problem from conducting real earnings management activities.
TABLE OF CONTENTS iii
LIST OF TABLES iv
1 INTRODUCTION 1
2 LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT 7
2.1 Financial Constraint and Earnings Management 7
2.2 Earnings Management and Innovation Strategies 9
2.3 Financial Constraint, Innovation Strategies, and Earnings Management 12
3 DATA AND METHODOLOGY 14
3.1 Accrual Earnings Management 15
3.2 Real Earnings Management 17
3.3 Financial Constraint 18
3.4 In-House Patenting Activities and Patent Purchasing 18
3.5 Models 19
4 EMPIRICAL RESULTS 20
4.1 Descriptive Statistic 20
4.2 Univariate Comparisons 21
4.3 Multivariate Regression Analysis 23
5 ADDITIONAL TEST 29
6 CONCLUSION 33
APPENDIX A Variable Definition 37
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