Discretionary R&D Expenditure and Accounting Conservatism

Purpose: This study aims to investigate the relationship between firms' discretionary R&D expenditures and accounting conservatism, with a particular focus on determining whether discretionary spending increases the market's demand for accounting conservatism or directly enhances accounting conservatism itself. Design/methodology/approach: The analysis is conducted using non-financial firms listed on the KOSPI and KOSDAQ markets from 2013 to 2023. Discretionary R&D expenditures are estimated using the model proposed by Qian et al. (2012), while accounting conservatism is measured based on the methodologies outlined by Basu(1997) and Ball and Shivakumar (2005). Findings: First, the discretionary R&D expenditures of firms showed a positive relationship with accounting conservatism. This result suggests that discretionary R&D spending increases information uncertainty, leading to higher demand for accounting conservatism from market participants. Second, the positive relationship between discretionary R&D expenditures and accounting conservatism was more pronounced in the KOSDAQ market. Moreover, the market's demand for accounting conservatism regarding discretionary R&D expenditures was higher in firms with lower foreign investor presence and lower debt ratios. Research limitations/implications: Corporate R&D expenditures may heighten the demand for accounting conservatism, as they are perceived as expenditures that increase short-term uncertainty and information asymmetry. Originality/value: This study is significant in that it examines the market's perception of discretionary R&D expenditures in the Korean capital market through the lens of accounting conservatism.