Consequences for Future Return with Earnings Management through Real Operating Activities

César Medeiros Cupertino,Newton Carneiro Affonso Da Costa Jr,Antonio Lopo Martinez

doi:10.1590/1808-057x201602520

César Medeiros Cupertino, Newton Carneiro Affonso Da Costa Jr + Show 1 more

Open Access

https://doi.org/10.1590/1808-057x201602520

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Abstract

ABSTRACT This article analyzes earnings management through real operating activities by firms in the Brazilian capital market. This way of manipulating outcomes takes place when managers make suboptimal decisions in terms of timing and volume of operating activities. This study tests the hypothesis that firms engaged in earnings management through real operating activities might have a negative impact on future returns. Our analysis is restricted to nonfinancial firms listed on the Brazilian Securities, Commodities, and Futures Exchange (BM&FBOVESPA) with annual data made available by the Economatica(r) for the years from 1989 to 2012. Empirical tests involving regression on panel data and estimation of future firm returns and outcomes indicate a negative impact on return on assets (ROA) related to manipulation through real operating activities. This finding is useful for several stakeholders. It demonstrates that manipulation through real operating activities takes place in the Brazilian capital market, suggesting that earnings management extends beyond discretionary accounting choices in this country. The main contribution is demonstrating a negative relation between earnings management by using real operating activities and future returns. This finding is relevant for investors, particularly for the purposes of comparison and valuation of securities.

Highlights

Consequences for Future Return with Earnings Management through Real Operating ActivitiesThis article analyzes earnings management through real operating activities, by means of data for the years from 1989 to 2012 obtained from a sample of companies listed on the Brazilian Securities, Commodities, and Futures Exchange (BM&FBOVESPA)
4.1 Impact of real activities management” (RAM) on Future Returns The hypothesis assumes there is a negative relation between using RAM and future firm returns
It is worth highlighting that the indicators of returns (ROA & cash flow) were “Winsorized” to a limit of 1.5% at the extremes of the distribution to reduce the effect of outliers

Summary

Introduction

Consequences for Future Return with Earnings Management through Real Operating ActivitiesThis article analyzes earnings management through real operating activities, by means of data for the years from 1989 to 2012 obtained from a sample of companies listed on the Brazilian Securities, Commodities, and Futures Exchange (BM&FBOVESPA). The term “earnings management” describes the decision made by some managers to employ accounting methods or direct operating activities in order to meet specific goals concerning the outcomes reported in financial statements. Earnings management for such purposes is classified by considering if the methods affect the accrual-based accounting process or normal operation (Enomoto, Kimura, & Yamaguchi, 2015). Conclusions on a given entity’s performance may be erroneous if shareholders are unable to identify and adjust the effects of earnings management embedded in financial statements This distortion becomes clear in future outcomes, when an entity’s performance does not match forecasts

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