MNCs’ Strategy in R&D: The Effect of the Decentralization on the Performance and on the Earnings Management

Abstract

This paper studies the relationship between R&D decentralization and financial performance. It examines also the impact of this decentralization on earnings management. To specify what does matter in the decentralization of the R&D we try to examine the relationship between centralization or decentralization of the R&D and the firm’s performance on one hand and the earnings management as measured by discretionary accruals on the other hand. We use two internal finance indexes (internal cash flows, internal market capital) and two mechanism of governance (stock-options, institutional investors) to explain the determinants of the R&D’s strategy.Using a sample of 160 U.S. Multinational companies (MNCs) between 2001 and 2006 our results show that MNCs decentralize their R&D for dual goal to improve firm’s profitability or performance and to help manager to manage earnings in their own interest. Moreover, despite the fact that R&D decentralization has a positive impact on performance, institutional shareholders and performance-based compensation encourage managers to decentralize their R&D in order to spur their opportunistic behavior.