What Does Matter in R&D Decentralization : Financial Performance Worry or Intensive Earnings Management?

This paper examines whether R&D decentralization influences 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 integrate two internal finance indexes (internal cash flows, internal market capital) and two mechanism of governance (stock-options, institutional investors) to examine the factors which can likely influence the centralization or the decentralization of the R&D. Using a sample of 160 U.S. MNCs over the 2001-2006 period we have shown that MNCs decentralize their R&D for dual goal: to improve profitability and to manage earnings. We have also found that although they have significantly positive effects on performance, institutional shareholders and performance-based compensation encourage managers to decentralize their R&D in order to spur their opportunistic behavior