Abstract
This research examines the relationship between unconditional accounting conservatism and real earnings management in China’s corporations. Using the regression models, the real earnings management proxies are found by the abnormal cash flow of operations, the abnormal operation costs and the abnormal discretionary expenses and the aggregated measures. The research sheds light on the negative relationship between unconditional accounting conservatism and real earnings management after controlling internal control quality and audit risk. The results of these inferences remain the same after dealing with the robustness analysis and the endogeneity concerns.
Highlights
Earnings management is always the hot debate in accounting research
Real earnings management would become an alternative for the management teams on the purposes of benefiting their own interests rather than maximizing the shareholder’s wealth
This paper measures the real earnings management in different ways. These methods mainly involve in calculating the abnormal cash flow of operations, the abnormal production costs, the abnormal discretionary expenses and the aggregate measures
Summary
Earnings management is always the hot debate in accounting research. In accordance with the literature, many factors cause earnings management, for example, internal governance, audit quality, management power and financial debt covenant, etc. Many previous researches have emphasized on the relationship between conservatism and accrual-based earnings management, very few papers investigate the association between accounting conservatism and real earnings management. Following the research by Roychowdhury (2006) and Cohen et al (2008), real earnings management (hereafter abbreviated as REM) is measured as the abnormal cash flow of operation, the abnormal production costs, the abnormal discretionary expenses and other aggregated measures All these abnormal values are the residual values that solved from the regression models. This paper sheds light on the relationship between the unconditional accounting conservatism and real earnings management. It contributes to the literature in the following ways.
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