Research and development accounting treatment: effects of CEO characteristics and corporate governance mechanisms

  • Authors

    • Sana Triki Damak IHEC SFAX
    2017-08-24
    https://doi.org/10.14419/ijaes.v5i2.8091
  • CEO Characteristics, Corporate Governance, R&D, France.

  • This study aims to examine empirically the influence of Chief Executive Officer (CEO) characteristics and corporate governance mechanisms on Research and Development (R&D) capitalization in France.

    Using data drawn from a sample of non-financial firms listed in SBF 120, this study provides empirical evidence for the influence of CEO characteristics and audit quality on R&D capitalization. As results, we find that R&D capitalization is likely to be increased in firms managed by younger managers, CEOs with higher ownership, shorter tenure and higher educational level. Also, R&D capitalization is likely to be increased in firms with lower audit quality, in higher leveraged firms, in less performed and larger firms.

    This study offers insights to investors and accounting standard setters interested about the subject of R&D capitalization determinants. Importantly, it confirms that some CEO characteristics and corporate governance mechanisms are likely to affect the CEO’s behavior regarding the R&D accounting treatment.

  • References

    1. [1] Abdoli, M. R. & Royaee, R. (2012) ‘Board monitoring and earnings quality: an empirical study in Iran’, African Journal of Business Management, Vol. 6 No. 11, pp.4179-4184.

      [2] Aboody, D & Lev, B. (1998) ‘the value relevance of intangibles: the case of software capitalization’, Journal of Accounting Research, Vol. 36 No. supplement, pp.161-191. https://doi.org/10.2307/2491312.

      [3] Anderson, R. C., Mansi, S., & Reeb, D. M. (2004) ‘Board characteristics, accounting report integrity, and the cost of debt’, Journal of Accounting & Economics, Vol. 37 No. 3, pp.315-342. https://doi.org/10.1016/j.jacceco.2004.01.004.

      [4] Anwer S. A. & Scott, D. (2013) ‘Managerial Overconfidence and Accounting Conservatism’, Journal of Accounting Research, Vol. 51 No. 1, pp.1-30. https://doi.org/10.1111/j.1475-679X.2012.00467.x.

      [5] Ali, A. & Zhang, W. (2015) ‘CEO Tenure and Earnings Management’, Journal of Accounting and Economics, Vol. 59 No. 1, pp.160-79. https://doi.org/10.1016/j.jacceco.2014.11.004.

      [6] Arcay, M.R.B. & Vázquez, M.F.M. (2005) ‘Corporate characteristics governance rules and the extent of voluntary disclosure in Spain’, Advances in Accounting, Vol. 21 No. 1, pp. 299-331. https://doi.org/10.1016/S0882-6110(05)21013-1.

      [7] Banal-Estañol, A. & Macho-Stadler, I. (2010) ‘Scientific and Commercial Incentives in R&D: Research versus Development?’, Journal of Economics & Management Strategy, Vol.19 No. 1, pp.185-221. https://doi.org/10.1111/j.1530-9134.2009.00250.x.

      [8] Barker, V.L. & Mueller, G.C. (2002) ‘CEO characteristic and firm R&D spending’, Management Science, Vol. 48 No. 6, pp.782-801. https://doi.org/10.1287/mnsc.48.6.782.187.

      [9] Benali, A. (2013) ‘The Shareholders Confidence and Effectiveness of the Joint Auditors: Empirical Validation in the French Context’, International Journal of Business and Management, Vol. 8 No.11, pp.76-84. https://doi.org/10.5539/ijbm.v8n11p76.

      [10] Ben Othman, H. & Zéghal, D. (2006) ‘A Study of Earnings Management Motives in the Anglo-American and Euro-Continental Accounting Models: The Candian and French Cases’, The International Journal of Accounting, Vol. 41 No. 4, pp.406-435. https://doi.org/10.1016/j.intacc.2006.09.004.

      [11] Bertin, E. (2002) ‘formation à l’audit: déterminants, contenu et voies de recherche’. Paper presented at 23th Congress of AFC (Association Française de Comptabilité) May 2002, Toulouse.

      [12] Bétriou J.L. & Vignolles M. (1990) ‘Influence des options en consolidation sur la présentation des comptes’, Revue Fiduciaire Comptable, Vol. 154 No. 6, pp.23-28.

      [13] Bourmont, M. (2006) ‘Les déterminants de la publication d'informations sur les activités de recherche et développement en France: une étude longitudinale et méthodologique’. Paper presented at 27th Congress of AFC (Association Française de Comptabilité). May 2006, Tunisie.

      [14] Cazavan-Jeny, A., Jeanjean, T. & Joos, P. (2011) ‘Accounting choice and future performance: The case of R&D accounting in France’, Journal of accounting and public policy, Vol. 30 No. 2, pp.145-165. https://doi.org/10.1016/j.jaccpubpol.2010.09.016.

      [15] Chambers, D.J., Jennings, R. & Thompson, R.B. (2003) ‘Managerial Discretion and Accounting for Research and Development Costs’, Journal of Accounting, Auditing and Finance, Vol. 18 No. 1, pp.79-113. https://doi.org/10.1177/0148558X0301800105.

      [16] Chen, H.L. & Hsu, W. T. (2009) ‘Family ownership, board independence and R&D investment’, Family Business Review, Vol. 22 No. 4, pp.347-362. https://doi.org/10.1177/0894486509341062.

      [17] Chi, H.Y. & Weng, T.C. (2014) ‘Managerial legal liability and Big 4 auditor choice’, Journal of Business Research, Vol. 67 No. 9, pp.1857-1869. https://doi.org/10.1016/j.jbusres.2013.12.003.

      [18] Chi, W., Liu, C. & Wang, T. (2009) ‘what affects accounting conservatism: A corporate governance perspective’, Journal of Contemporary Accounting & Economics, Vol. 5 No. 1, pp.47-59.

      https://doi.org/10.1016/j.jcae.2009.06.001.

      [19] Chikh, S. & Filbiena, J. Y. (2011) ‘Acquisitions and CEO power: Evidence from French networks’, Journal of Corporate Finance, Vol 17 No. 1, pp.1221-1236.

      https://doi.org/10.1016/j.jcorpfin.2011.06.007.

      [20] Cormier, D., Magnan, M. & Morard, B. (1998) ‘La gestion stratégique de résultats: le modèle anglo-saxon convient-il au contexte Suisse ?’, Comptabilité Contrôle Audit, Vol. 1 No. 3, pp.25-48. https://doi.org/10.3917/cca.041.0025.

      [21] Dameron, S. (2008) ‘La Généalogie des Nouveaux Dirigeants’, In Le Nouveau Visage des Dirigeants du CAC40, Chapter 1, pp.7-16. Paris: Pearson Edition.

      [22] De Fond, M. & Jiambalvo, J. (1994) ‘Debt covenant violation and manipulation of accruals’, Journal of Accounting and Economics, Vol. 17 No 1-2, pp.145-176. https://doi.org/10.1016/0165-4101(94)90008-6.

      [23] Dong, J. & Gou, Y. N. (2010) ‘Corporate governance structure, managerial discretion and the R&D investment in China’, International Review of Economies and Finance, Vol. 19 No. 2, pp.180-188. https://doi.org/10.1016/j.iref.2009.10.001.

      [24] Dimitropoulos, P. & Asteriou, D. (2010) ‘the effect of board composition on the informativeness and quality of annual earnings: empirical evidence from Greece’, Research in International Business and Finance, Vol. 24 No. 2, pp.190-205.

      https://doi.org/10.1016/j.ribaf.2009.12.001.

      [25] Dinh, T., Kang, H. & Schultze, W. (2016) ‘Capitalizing Research & Development: Signaling or Earnings Management?’ European Accounting Review, Vol. 25 No. 2, pp.373-401.

      https://doi.org/10.1080/09638180.2015.1031149.

      [26] Dumas, G. (2013) ‘Gestion processuelle des résultats: Une étude pré- et post-IFRS des dépenses de R&D des entreprises françaises cotées’, Paper presented at 34th Congress of AFC (Association Française de Comptabilité), May, 2013 Montréal.

      [27] El aouadi, A. (2001) ‘Les stratégies d’enracinement des dirigeants d’entreprise : le cas marocain’, Working paper n° 599 CEROG, IAE d’Aix-Marseille, May, 2001.

      [28] Finkelstein, S. (1992) ‘Power in top management teams: dimensions, measurement, and validation’, Academy of Management Journal, Vol. 35 No. 3, pp. 505-538.

      https://doi.org/10.2307/256485.

      [29] Firth, M., Fung, P. M.Y., & Rui, O. M. (2007) ‘Ownership, two-tier board structure, and the informativeness of earnings-evidence from China’, Journal of Accounting and Public Policy, Vol. 26 No. 4, pp. 463-496. https://doi.org/10.1016/j.jaccpubpol.2007.05.004.

      [30] Forker, J. (1992) ‘Corporate governance and disclosure quality’, Accounting and Business Research, Vol. 22 No. 86, pp.111-124. https://doi.org/10.1080/00014788.1992.9729426.

      [31] Garcia Lara, J.M., Garcia Osma, B. & Penalva, F. (2009) ‘Accounting conservatism and corporate governance’, Review of Accounting Studies, Vol. 14 No. 1, pp.161-201. https://doi.org/10.1007/s11142-007-9060-1.

      [32] General Accounting Plan (1999) ‘Règles et méthodes relatives aux comptes consolidés’, Order of 22 June 1999 approving Regulation 99-02 du CRC, KPMG, Économica, 24 pages.

      [33] Ghosh, A., Moon, D. & Tandon, K. (2007) ‘CEO ownership and discretionary investments’, Journal of Business Finance & Accounting, Vol. 34 No. 5-6, pp.819-839.

      https://doi.org/10.1111/j.1468-5957.2007.02011.x.

      [34] Gul, F.A. & Leung, S. (2004) ‘Board Leadership, Outside Directors’ Expertise and Voluntary Corporate Disclosures’, Journal of Accounting and public Policy, Vol. 23 No. 5, pp.351-379. https://doi.org/10.1016/j.jaccpubpol.2004.07.001.

      [35] Healy, P.M., Myers, S.C. & Howe, C.D. (2002) ‘R&D Accounting and the Trade-off Between Relevance and Objectivity’, Journal of Accounting Research, Vol. 40 No. 3, pp.677-710.

      https://doi.org/10.1111/1475-679X.00067.

      [36] Ho, S. S. M. & Wong, K. S. (2001) ‘A study of corporate disclosure practice and effectiveness in Hong Kong’, Journal of International Financial Management and Accounting, Vol. 12 No. 1, pp.75-102. https://doi.org/10.1111/1467-646X.00067.

      [37] Holtz, L. & Neto, A. S. (2014) ‘Effects of Board of Directors' Characteristics on the Quality of Accounting Information in Brazil’, Revista Contabilidade & Finanças, Vol. 25 No. 66, pp.255-266. https://doi.org/10.1590/1808-057x201412010.

      [38] Huang, H.W., Rose-Green, E. & Lee, C. C. (2012) ‘CEO Age and Financial Reporting Quality’, Accounting Horizons, Vol. 26 No. 4, pp.725-740. https://doi.org/10.2308/acch-50268.

      [39] IASB (2009) ‘IAS 38 (revised): Intangible Assets’, London, available at: http://www.ifrs.org.

      [40] Jedidi Hentati, E. & Jilani, F. (2013) ‘The determinants of non-audit fees in French firms’, Management Science Letters, Vol. 3 No.3, pp.1773-1782. https://doi.org/10.5267/j.msl.2013.05.004.

      [41] Jensen, M. C. & Murphy, K. J. (2010) ‘CEO Incentives—It's Not How Much You Pay, But How’, Journal of Applied Corporate Finance, Vol. 22 No.1, pp. 64-76. https://doi.org/10.1111/j.1745-6622.2010.00262.x.

      [42] Kamarudin, K.A., Ismaila, W. A. I. & Samsuddina, M. E. (2012) ‘The Influence of CEO Duality on the Relationship between Audit Committee Independence and Earnings Quality’, Procedia-Social and Behavioral Sciences, Vol. 65 No. 3, pp.919-924. https://doi.org/10.1016/j.sbspro.2012.11.220.

      [43] Kim K., E., Mauldin, S. & Patro, S. (2014) ‘Outside directors and board advising and monitoring performance’, Journal of Accounting and Economics, Vol. 57 No.2-3, pp.110-131.

      https://doi.org/10.1016/j.jacceco.2014.02.001.

      [44] Klein, A. (2002) ‘Audit Committee, Board of Director Characteristics, and Earnings Management’, Journal of Accounting and Economics, Vol. 33 No.2-3, pp.375-400.

      https://doi.org/10.1016/S0165-4101(02)00059-9.

      [45] Koh, P. S., David M. & Zhao, R. W. (2015) ‘Forcing Managers to Talk: CEO Confidence and R&D Opacity’, Working paper, available at:

      http://www.davidreeb.net/uploads/4/8/0/7/48079951/forcing_managers_to_talk_4-29.pdf.

      [46] Landry, S. & Callimaci, A. (2003) ‘The effect of management incentives and cross-listing status on the accounting treatment of R&D spending’, Journal of International Auditing and Taxation, Vol. 12 No. 2, pp.131-152.

      https://doi.org/10.1016/j.intaccaudtax.2003.08.003.

      [47] Lara, J. M. G., Osma, B. G. & Penalva, F. (2007) ‘Board of directors' characteristics and conditional accounting conservatism: Spanish evidence’, European Accounting Review, Vol. 16 No. 4, pp.727-755. https://doi.org/10.1080/09638180701706922.

      [48] Liao, C. H. (2011) ‘The effect of stock-based incentives and governance mechanisms on voluntary disclosure of intangibles’, Advances in Accounting, Vol. 27 No. 2, pp.294-307.

      https://doi.org/10.1016/j.adiac.2011.04.002.

      [49] Markarian,G., Pozza, L. & Prencipe, A. (2008) ‘Capitalization of R&D costs and earnings management: Evidence from Italian listed companies’, The International Journal of Accounting, Vol. 43 No. 3, pp.246-267. https://doi.org/10.1016/j.intacc.2008.06.002.

      [50] Marra A., Mazzola, P., & Prencipe, A. (2011) ‘Board monitoring and earnings management pre- and post-IFRS’, The International Journal of Accounting, Vol. 46 No. 2, pp. 205-230. https://doi.org/10.1016/j.intacc.2011.04.007.

      [51] Matsunaga, S. R. & Yeung, P. E. (2008) ‘Evidence on the Impact of a CEO's Financial Experience on the Quality of the Firm's Financial Reports and Disclosures’, AAA 2008 Financial Accounting and Reporting Section (FARS), SSRN electronic journal, available at: https://doi.org/10.2139/ssrn.1014097.

      [52] Miller, K. D. & Bromiley, P. (1990) ‘Strategic Risk and Corporate Performance: An Analysis of Alternative Risk Measures’, Academy of Management Journal, Vol. 33 No. 4, pp. 756-779.

      https://doi.org/10.2307/256289.

      [53] Mouline, J.P. (2000) ‘Dynamique de la succession managériale dans la PME familiale non cotée’, Finance Contrôle Stratégie, Vol.3 No.1, pp.197-222.

      [54] Murphy, T., O’Connell, V. & Ohogartaigh, C. (2013) ‘Discourses surrounding the evolution of the IASB/FASB Conceptual Framework: What they reveal about the “living law†of accounting’, Accounting, Organizations and Society, Vol. 38 No. 1, pp.72-91. https://doi.org/10.1016/j.aos.2012.07.003.

      [55] Nekhili, M. & Fakhfakh, I. (2006) ‘les relations entre les mécanismes de gouvernement et l'indice de divulgation volontaire d'informations : étude clinique de deux entreprises Tunisiennes’. Paper presented at 27th Congress of AFC (Association Française de Comptabilité). May 2006, Tunis.

      [56] Nekhili, M. & Poincelot, E. (2000) ‘La fonction R&D et la latitude managériale : Une analyse théorique’, Finance-Contrôle-Stratégie, Vol. 3 No. 1, pp.5-28.

      [57] Nekhili, M. & Rebai Azouz, S. (2006) ‘Investissement en R&D, mode de comptabilisation et gestion des résultats’, Gestion 2000, Vol. 23 No. 6, pp.15-34.

      [58] Nekhili, M., Hussainey, K., Cheffi, W., Chtioui, T. & Tchakoute-tchuigoua, H. (2016) ‘R&D narrative disclosure, corporate governance and market value: Evidence from France’, Journal of Applied Business Research, Vol 32 No. 1, pp.111-138.

      https://doi.org/10.19030/jabr.v32i1.9527.

      [59] Nor, H. M., Saleh, N. M., Jaffar, R. & Shukor, Z. A. (2010) ‘Corporate Governance and R&D Reporting in Malaysian MESDAQ Market’, Int. Journal of Economics and Management, Vol 4 No. 2, pp. 350-372.

      [60] Oswald, D. R. (2008) ‘The determinants and value relevance of the choice of accounting for research and development expenditures in the United Kingdom’, Journal of Business Finance & Accounting, Vol 35 No. 1-2, pp.1-24. https://doi.org/10.1111/j.1468-5957.2007.02060.x.

      [61] Paquerot, M. (1997) ‘Stratégies d'enracinement des dirigeants, performance de la firme et structure de contrôle’, pp. 105-138/ Chapter of the collective book, under the direction of Charreaux G. : Le gouvernement de l'entreprise, Théories et faits», Économica, ISBN: 9782717832532, 540 pages.

      [62] Percy, M. (2000) ‘Financial reporting discretion and voluntary disclosure corporate research and development expenditure in Australia’, Asian Pacific Journal of Accounting & Economics, Vol. 7 No. 1, pp.1-31. https://doi.org/10.1080/16081625.2000.10510572.

      [63] Pigé, B. (1998) ‘Enracinement des dirigeants et richesse des actionnaires’, Finance-Contrôle-Stratégie, Vol. 1 No. 3, pp.131-158.

      [64] PricewaterhouseCoopers (2010) ‘Accounting for innovation: The impact on technology companies of accounting for R&D activity under IFRS’, Available at:

      https://www.pwc.com/us/en/issues/ifrs-reporting/assets/ifrs-technology-accounting-r-d.pdf.

      [65] Schrand, C. M. & Zechman, S. L. C. (2012) ‘Executive overconfidence and the slippery slope to financial misreporting’, Journal of Accounting and Economics, Vol. 53 No. 1-2, pp.311-329.

      https://doi.org/10.1016/j.jacceco.2011.09.001.

      [66] Rebai Azouz, S. (2011) ‘Les motivations de l’inscription des investissements en R&D à l’actif: divulgation volontaire d’informations ou gestion des résultats?’, Paper presented at 32th Congress of AFC (Association Française de Comptabilité), May, 2011, Montpellier.

      [67] Sundaram, R. K. & Yermack, D. L. (2007) ‘Pay Me Later: Inside Debt and Its Role in Managerial Compensation’, Journal of Finance, Vol. 62 No. 4, pp.1551-1588. https://doi.org/10.1111/j.1540-6261.2007.01251.x.

      [68] Thi, T. & Shultze, W. (2014) ‘Capitalizing research and development (R&D) expenditures-Do the perceived benefits materialize in practical application?’ Working paper, University of New South Wales, Available at:

      https://www.researchgate.net/publication/266462344_Capitalizing_research_and_development_RD_expenditures.

      [69] Triki Damak, S. & Halioui, K. (2013) ‘Accounting treatment of R&D expenditures and earnings management: an empirical study on French listed companies’, Global Business and Economics Research Journal, Vol. 2 No. 1, pp.50-71.

      [70] Triki Damak, S. & Halioui, K. (2016) ‘R&D investment, management entrenchment and governance mechanisms: evidence from French listed companies on SFB120 index’, Int. J. Accounting and Finance, Vol. 6, No. 3, pp. 197-218.

      https://doi.org/10.1504/IJAF.2016.081700.

      [71] Tutticci I., Krishnan G. & Percy M. (2007) ‘the role of external monitoring in firm valuation: The case of R&D capitalisation’, Journal of International Accounting Research, Vol. 6, No. 2, pp. 83-107. https://doi.org/10.2308/jiar.2007.6.2.83.

      [72] Vernimmen, P., Quiry, P. & Fur, Y.L. (2014) ‘Finance d’entreprise’, Dalloz, ISBN: 9782247129751, 1201 pages.

      [73] Warfield, T.D., Wild, J.J. & Wild, K.L. (1995) ‘Managerial ownership, accounting choices, and informativeness of earnings’, Journal of Accounting and Economics, Vol. 20 No. 1, pp.61-91. https://doi.org/10.1016/0165-4101(94)00393-J.

      [74] Williams, L. J. & Hazer, J. T. (1986) ‘Antecedents and consequences of satisfaction and commitment in turnover models: A reanalysis using latent variable structural equation methods’, Journal of Applied Psychology, Vol. 71 No. 2, pp.219-232.

      https://doi.org/10.1037/0021-9010.71.2.219.

      [75] Wu, J. & Tu, R. (2007) ‘CEO stock option pay and R&D spending: a behavioral agency explanation’, Journal of Business Research, Vol. 60 No. 5, pp.482-492.

      https://doi.org/10.1016/j.jbusres.2006.12.006.

      [76] Zhao, R. (2002) ‘Relative Value Relevance of R&D Reporting: An International Comparison’, Journal of International Financial Management and Accounting, Vol. 13 No. 2, pp.153-172.

      https://doi.org/10.1111/1467-646X.00082.

      [77] Zéghal, D., Mouelhi, R. & Louati, H. (2007) ‘An analysis of the determinants of R&D voluntary disclosure by Canadian firms’, The Irish Accounting Review, Vol. 14 No. 2, pp.61-89.

  • Downloads

  • How to Cite

    Triki Damak, S. (2017). Research and development accounting treatment: effects of CEO characteristics and corporate governance mechanisms. International Journal of Accounting and Economics Studies, 5(2), 124-133. https://doi.org/10.14419/ijaes.v5i2.8091