Abstract
This study investigates whether and how institutional shareholders affect the relation between unconditional conservatism and earnings management. We analyze the relation between unconditional conservatism and accrual-based earnings management and the relation between unconditional conservatism and real earnings management, focusing on the role of the institutional shareholders variable in these two relations. First, we find evidence of positive (negative) relations between unconditional conservatism and accrual-based (real) earnings management. Second, we demonstrate that the presence of institutional shareholders has a mitigating (amplifying) impact on the relation between unconditional conservatism and accrual-based (real) earnings management. This study contributes to enrich the previous literature in two ways. First, it extends the strand of research on the relation between accounting conservatism and earnings management (Garcìa Lara, García Osma, & Penalva, 2020; Chen, Hemmer, & Zhang, 2007; Gao, 2013), focusing on unconditional conservatism since it is less prevalent than conditional conservatism in previous literature (Ruch & Taylor, 2015). Second, it extends the strand of research on the impact of institutional ownership on accounting practices (Farooq & El Jai, 2012; Sakaki, Jackson, & Jory, 2017), highlighting the role of the institutional shareholders in the relation between unconditional conservatism and earnings management
Highlights
Several studies investigated the intrinsic characteristics of the earnings management phenomenon, its potential causes, and consequences
We find evidence that unconditional conservatism leads to higher accrual-based earnings management and lower real earnings management and that institutional ownership mitigates the relation between unconditional conservatism and accrual-based earnings management, while it intensifies the relation between unconditional conservatism and real earnings management
The coefficient (0.14, t-stat = 2.00) is positive and significant at conventional levels; in addition, it is lower than. This confirms our prediction about the mitigation effect of the institutional ownership variable over the positive relation between accrual-based earnings management and unconditional conservatism
Summary
Several studies investigated the intrinsic characteristics of the earnings management phenomenon, its potential causes, and consequences. The results lead to unequivocal conclusions, while in others, when conflicting, prompt new and pioneering reflections. There is still a large research area on this topic and the results obtained so far are far from being exhaustive. 92), whether accrual-based or e l, o u when ―m n ge s use judgement in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or influence contractual outcomes that depend on reported accounting numbe s‖ This study investigates whether and how unconditional conservatism influences accrual-based earnings management and real earnings management Accrualbased earnings management is the manipulation of earnings through the loopholes in the accounting regulatory system and the clever manipulation of e t in fin n i l st tements’ items, while e l earnings management is mainly based on real business policies, such as the anticipation or postponement of sales or the decision to carry out transactions with related parties only for specific accounting purposes.
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