Discretionary Accrual in the Knowledge-Based Economy

The modern economy transit from manufacturing to knowledge-based industries that are dependent on investments in R&D, advertising, and employee talents. These investments and much of the value that they generate cannot be capitalized as assets. As these intangible assets are off-balance-sheet, a firm’s book value might be low. When book value fails to present a firm’s true value, we stipulate that management has incentive to manage its earnings to convey information that is not reflected in the balance sheet. We find that firms with negative book value and in the New Economy use more discretionary accruals.