Conservatism, Earnings Management and R&D Capitalization

Abstract

This paper sheds light on the relationship between accounting conservatism and earnings management. It finds that accounting conservatism is negatively associated with real earnings management. Furthermore, it also tests that accounting conservatism has an effect that it can restrict on the innovation inputs which is measured by the extent of capitalized R&D. This effect of negative relationship between accounting conservatism and earnings management would increase under the situation that the firms have higher level of financial leverage.