Skip to main content
Open Access Publications from the University of California

UC Berkeley

UC Berkeley Electronic Theses and Dissertations bannerUC Berkeley

The Use of Discretionary Expenditures as an Earnings Management Tool: Evidence from Financial Misstatement Firms


This study examines the use of real earnings management in a setting where earnings manipulation is likely to have occurred. Using firms subject to SEC Accounting and Auditing Enforcement Releases, I find that misstating firms show lower discretionary SG&A but higher discretionary R&D than the control sample in the years in which they overstate earnings. I then investigate whether this result is explained by heightened management incentives to support stock prices. I find evidence consistent with investors overvaluing high discretionary R&D and low discretionary SG&A during misstatement years. Overall, these results suggest that while cutting SG&A is considered a feasible earnings management tool to inflate earnings and stock prices, cutting R&D is not a viable option in a setting where managers desire to signal growth and maintain high stock market valuations.

Main Content
For improved accessibility of PDF content, download the file to your device.
Current View