Effect of Research and Development Earning Management on Financial Performance of Non- Financial Firms in Kenya

Abstract

The role of research and development (R&D) earnings management in shaping firm performance has attracted significant scholarly and policy interest, particularly in emerging markets where innovation and transparency are central to competitiveness. This study investigates the effect of R&D earnings management on the financial performance of non-financial firms listed on the Nairobi Securities Exchange (NSE) between 2004 and 2020. Guided by a positivist philosophy, the study employed an explanatory longitudinal design using panel data from 44 purposively selected firms. Secondary data were extracted from audited financial statements, NSE handbooks, and Capital Markets Authority publications. Financial performance was measured through return on assets (ROA), return on equity (ROE), earnings per share (EPS), and Tobin’s Q, while R&D earnings management was assessed using a modified Dechow and Dichev accrual model. Data analysis involved descriptive statistics and panel regression, with diagnostic tests conducted to ensure model robustness. The findings reveal that R&D earnings management has a positive and statistically significant influence on financial performance. The regression results show that a unit increase in R&D earnings management improves financial performance by approximately 0.107 units (p < 0.01). The model explains about 59.1% of the variation in financial performance (R² = 0.5913), indicating a substantial explanatory power. Descriptive statistics further suggest moderate-to-high variability in R&D earnings management practices, reflecting the heterogeneous strategies adopted by firms. The analysis of ROA, ROE, and EPS trends underscores that while some firms benefit from conservative earnings management, others adopt aggressive strategies, potentially to enhance their market perception. The study concludes that R&D earnings management significantly contributes to the financial performance of Kenyan non-financial firms. These findings highlight the dual role of earnings management as both a driver of short-term performance and a potential source of long-term ethical and sustainability concerns. The study provides valuable insights for policymakers, investors, and corporate managers on balancing innovation-driven investments with transparent financial reporting.