R&D Classification Shifting Earning Management In CSOEs

"The Revision of Interim Measures for Business Performance Appraisals of Persons-in-Charge at Central State-Owned Enterprises" have been released by SASAC in 2009,which adopted the EVA indicator instead of the ROE as the basic indicator of annual business performance assessment.At present,the EVA indicator has become a key indicator for the assessment of the SASAC.The EVA assessment method of SASAC stipulates that,when calculating the EVA indicator,the R&D expenses shall be added back to the profits.It should be noted that,unlike the EVA founder Sterntech’s calculation method of the adjustment of R&D expenses,the added R&D expenses does not increase the total capital.This means the zero-cost of R&D expenses and the R&D expense are more significant for the marginal benefit under the "localized" EVA indicator.The principal-agent theory believes that the performance appraisal system will affect the management’s reporting motivation.SASAC use the financial index for assessing the performance of Central State-Owned Enterprises.Then,as the trustee,the head of the central enterprise has the motive to "beautify" the performance indicators.In this context,this paper attempts to study whether the "local" EVA assessment will encourage the heads of central enterprises to increase the R&D classification shifting in order to meet the assessment results.Considering the availability of data,this paper selects the data of the listed central enterprises to replace the data of all.And it selects the data of all listed central enterprises and companies in the same industry from 2007 to 2015.Using difference-in-difference approach,this paper tests the evidence,motivation and consequence of R&D classification shifting in SOEs in the perspective of 2009 Performance Appraisals by employing Skaife’s model(2013).We find a significant increase of R&D classification shifting of SOEs compared to private listed enterprises which haven’t influenced by this policy.SOEs engage more in it when they miss their earning targets.Further tests found R&D classification shifting have an incremental negative impact on SOE’s performance.Then,this paper uses four methods to verify the reliability of the empirical results,including redefining the control group of DID model,PSM method,replacing explanatory variable and control variables.In the end,this paper puts forward the recommendations for improving performance appraisals of SOE’s.