Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Share Icon Share Facebook Twitter LinkedIn MailTo Tools Icon Tools Get Permissions Search Site Cite View This Citation Add to Citation Manager Citation Nicholas Seybert; Partial Retraction: Section IV: Survey in R&D Capitalization and Reputation-Driven Real Earnings Management. The Accounting Review 1 July 2015; 90 (4): 1707. https://doi.org/10.2308/accr-10453 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest filter your search All ContentThe Accounting Review Search Advanced Search

Prior research finds that mandatory expensing induces underinvestment in research and development (R&D). The current study investigates whether capitalization can also create R&D investment problems. Abandoning a capitalized project requires asset impairment, a negative reporting effect that could damage managers' reputations. In an experiment utilizing M.B.A. student participants, I find that managers responsible for initiating an R&D project are more likely to overinvest when R&D is capitalized. I show that high self-monitors (those most likely to alter their behaviors to convey a positive image) are most likely to overinvest, suggesting that reputation concerns contribute to this behavior. A follow-up survey reveals that, when R&D is capitalized, experienced executives anticipate overinvestment and expect project abandonment to have a stronger negative impact on the responsible manager's reputation and future prospects at their firm. The results suggest that managers are held responsible for the external reporting consequences of their projects, such that mandating R&D capitalization may not reduce real earnings management.

This paper examines how the reversibility of the accounting effect of asset impairments affects managers' investment decisions. We conduct two experiments in which participants act as CEO of a multi-division electronics company that suffers a large asset impairment at one of the divisions. Drawing on prior psychology research involving cognitive dissonance and decision reversibility, we predict and find that managers who are responsible for the decision to record the asset impairment invest more in the impaired division when the accounting effect of the impairment is reversible than when it is irreversible. This is consistent with the idea that reversible accounting effects encourage behavioral attempts to alter the cash flow outcome, while irreversible accounting effects encourage belief revision to rationalize the cash flow outcome. Also in line with cognitive dissonance theory, we show that managers who are not responsible for the decision to impair the asset, or managers who are given the opportunity to deny responsibility for the asset impairment, do not differ in their investment in the impaired division, regardless of impairment reversibility.