Window Dressing in Reported Earnings: A Comparison of High-Tech and Low-Tech Companies

We examine the rounding phenomenon (called <i>window dressing</i>) in financial reporting of U.S. high-tech and low-tech firms. By requiring that investments in research and development be expensed as incurred, the generally accepted accounting principles provide low-tech firms with a larger set of accounting choices with which to manipulate earnings than are provided to high-tech firms. Therefore, we find window dressing of earnings is more severe in low-tech firms than in high-tech firms. We also find that window dressing of revenues is more severe in high-tech firms than in low-tech firms. This result suggests that high-tech firms engage more in revenue management to compensate for the smaller set of accounting choices with which to manage earnings.