THE RELATIONSHIP OF R&DEXPENDITURES AND EARNING MANAGEMENT IN UK FIRMS

Abstract

This study is amid to explore the relationship between R&D expenditures and earning management. The sample selected for the analysis is firm listed at London stock exchange. The rational of the study is that, more recently, the UK government aimed to increase the investment in R&D to 2.4% of the GDP by the end of 2027, this is a sign of encouragement shown by the Government in perspective of R&D. Thus, the objective of the study is to investigate the relationship between earning management and R&D expenses of UK firms listed at London stock exchange. The study uses a deductive methodology where observations are used to accept or reject a hypothesis. The study uses secondary data collected from a sample of UK firms. The sample of this study consists of firms included in the FTSE350. However, after imposing various sample selection restrictions, the final sample is comprised of 134 firms. The data has been collected for a period of 10 years, ranging from 2010 to 2019. As per the hypothesis developed for this study, the primary variable of interest is earnings management, while the main regressor of the study is the R&D expenditure. The firm size, firm growth and leverage are used as the control variables of the study. The data of the study is cross sectional in nature; therefore, panel data regression analysis techniques have been used to estimate the model of the study. The results of the study posit that there is a significant positive impact of R&D on earning management. The results are consistent with the previous literature that stated that there is a significant positive association between Earnings Management and R&D expenses.