| 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. |
