Accrual-based Earnings Management Research Articles

Earnings management with the absence of income tax avoidance motivation: evidence from pre-, during, and post- global financial crisis

PurposeThis study aims to examines both accrual and real-based earnings management (EM) behavior of listed corporations in tax-free countries during different economic situations. It also addresses the link between firm- and country-level determinants of accrual and real-based EM and explores economic conditions' influence on these determinants.Design/methodology/approachThe study examines 1,608 firm-years, covers sixteen years (2004–2019), clustered into three periods according to the global financial crisis (GFC): four years prior (2004–2007), two years during (2008–2009), and ten years post the GFC (2010–2019). We employ the modified Jones model (performance-matched) developed by Kothari et al. (2005) to measure the accrual-based EM (positive and negative discretionary accrual EM) and the three levels model for Dechow et al. (1998) to measure the real-based EM (cash flow from operating, discretionary expenses and abnormal production cost).FindingsThe study finds a significant increase in EM practices in the listed corporations in tax-free countries during the economic downturn. These corporations are found to understate their earnings during the economic stress period. Simultaneously, the firm-level determinants of EM practices were at the same level of significance during different economic conditions in accrual-based EM. In contrast, the country-level EM determinants vary based on the economic conditions.Originality/valueFinancial reports' users gain a deep understanding of the quality of financial reports in the context of tax-free country. And, the study outcomes inspire policymakers to develop relevant legislation to mitigate financial reports' risk and adequately protect the financial reports' users.

The effect of the COVID-19 pandemic on accrual-based earnings management: Evidence from four most affected European countries

This study aims to investigate the effect of the COVID-19 pandemic on accrual-based earnings management (EM) based upon a sampling of 938 listed firms from four selected European countries (United Kingdom, Italy, Spain, and Türkiye) during 2016–2020. We find that firms engage more in accrual-based EM through income-increasing and income-decreasing accruals in the year of the COVID-19 pandemic relative to the period before the pandemic. These findings imply that financial reporting reliability and usefulness decreased in the period of the pandemic. Our results are robust to some sensitivity checks.

Earnings quality and national IPO: AEM practices of Central Asia

Once the key insights of corporate finance quality in Kazakhstani listed state SOEs are obtained, it is time to turn to separate strategies of corporate reporting manipulations. The purpose of this research is to look at accrual-based AEM strategies that adjust real activity REM practices at year-end. We follow Kasznik cash flow model for accrual-based earnings management as a best practice methodology and apply it to 572 unbalanced panel firm-year non-financial observations over 13-year time horizon. To strengthen our analysis, we compare main results with another popular measurement of accrual-based Earnings management based on the Shivakumar 1996 model. We also winsorised key investment indicators to reduce the impact of outliers on the main results. The results answer major questions: 1) what AEM strategies state SOEs prefer; 2) how accrual-based manipulations affect the choice of investment indicators; and 3) whether partially-privatized state SOEs under/over perform private POEs in Kazakhstan. In terms of theoretical and practical implications, our research findings could be useful to analysts of various strategies in the AEM/REM dimensions, academic scientists and advocates of partial privatization of state companies. We assure that theoretical gaps of corporate data manipulations in Central Asian context are to be reduced with increasing number of publications in the field of AEM practices.

Environmental effects of foreign indirect investment: The information channel

We investigate the environmental consequences of foreign indirect investment in China. By exploring the implementation of the Shanghai-Hong Kong Stock Connect program, which induced a positive shock to foreign indirect investment, we find that connected firms reduced their commitment to environmental responsibility more than unconnected firms. We document evidence that this can be attributed to the switch from accrual-based earnings management to real earnings management when the information environment improves after the shock. This effect is more pronounced for firms that face weak environmental regulation and low social norm costs, which amplify the unintended consequences of the information channel of stock market liberalization in developing countries.

What Earnings Management Has to Do with Corporate Social Responsibility

With the continuing rise of attention towards societal challenges like, e.g., climate change, Corporate Social Responsibility (CSR) becomes an increasingly important topic for companies. While there is no question that CSR activities are on the rise, the connection towards Earnings Management in companies is less clear. Therefore, this research paper not only aims to provide an up-to-date picture on the literature addressing this interconnection, but also provides a profound base for a more solid theoretical framework. Thus, it delivers a critical basis for further empirical analyses in this field. In order to illustrate this interconnection between those two topics, this paper presents an SLR analysis of articles published in the Chartered Association of Business Schools (CABS) or Australian Business Deans Council (ABDC), focusing on empirical analyses of CSR performance and Earnings Management. Overall, it can be stated that CSR performance has a negative influence on Accrual-Based Earnings Management, while findings on the influence on Real Earnings Management are contradicting. Furthermore, the relationship of CSR performance and Accrual-Based Earnings Management/Real Earnings Management is especially vague when the used methods are moderated by different variables such as family involvement or managerial entrenchment. While the connection between Accrual-Based Earnings Management and CSR performance is widely covered in the existing literature, the relationship between Real Earnings Management and CSR performance is clearly less outlined. This research paper makes key contributions to the existing literature, as it combines and structures results of conducted studies during the last ten years and elaborates on the differences on commonalities of the results. This analysis also suggests that other factors that possibly influence Earnings Management or CSR should be included in a future research model for upcoming analyses. It places the findings of earlier studies into the context of the Ethical Approach, creating a roadmap for the future.

The Size of a Company and the Intensity of Use of Accrual-Based Earnings Management and Real Earnings Management Tools

Abstract Subject and purpose of work: The aim of the study is to analyse the relationship between the degree of use of accrual-based earnings management and real earnings management instruments and the size of public companies. Materials and methods: The empirical analyses are based on the results of a survey of finance and accounting professionals representing 124 non-financial companies listed on the Warsaw Stock Exchange. The Kruskal-Wallis test (along with tests of intergroup comparisons) was considered the primary method for assessing the relationships occurring between the variables considered. Results: The research showed that the intensity of using accrual-based earnings management and real earnings management tools is statistically dependent on both the value of generated net revenues from the sale of products, goods and materials and the value of total assets of a given company. However, a greater diversification of the values of variables describing the degree of use of earnings management instruments was recorded in individual sub-populations separated on the basis of the value of realised sales. Conclusions: The research appears to be relevant from the perspective of a further search for the determinants of financial performance manipulation in the Polish capital market.

Do Client Managers Strategically Manage Earnings in Response to Auditors’ Quantitative Materiality Threshold Disclosures?

SYNOPSIS Expanded audit report regulation in the United Kingdom requires auditor disclosure of client-specific quantitative materiality thresholds (QMTs). The United States decided against requiring this disclosure, concerned that providing clients with visibility into this important audit input could enhance managers’ ability to manage earnings without detection. Using the U.K. setting, we investigate whether clients strategically leverage their auditors’ QMTs to increase income through undetected earnings management. We examine the association between auditor QMT and client earnings management generally and in client settings where a material qualitative factor in the form of heightened earnings management incentives exists. In our general setting, we find a positive relation between auditors’ lagged and current QMTs and clients’ current-year accruals-based earnings management. We do not find a relation in our heightened earnings management settings, however, suggesting that auditors consider qualitative materiality factors and constrain clients’ auditor QMT-based earnings management. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M41; M42; M48.

Does the board of directors play a role in mitigating real and accrual-based earnings management in the MENA context?

PurposeIn light of the key role attributed to the board of directors as a monitoring tool to constrain earnings management practices, this study aims to examine the effect of some board attributes on accrual-based earnings management and real earnings management in the Middle Eastern and North African (MENA) context, whose institutional, economic and legal environment is markedly different from that of most organization for economic cooperation and development countries.Design/methodology/approachThe authors selected a sample of 161 nonfinancial companies from nine MENA countries between 2014 and 2021 (corresponding to an unbalanced data panel of 486 observations). The authors used the generalized least squares regression test to examine the relationship between board attributes and earnings management.FindingsThe authors found that three board attributes (size, independence and gender diversity) have no effect on both types of earnings management practices, while CEO duality has no effect on accrual-based earnings management but has a significant and negative effect on real earnings management. Overall, the results suggest that most board attributes do not play a crucial role in reducing earnings management.Research limitations/implicationsThe results provide valuable insights into the universal role of corporate governance mechanisms and raise questions about the role of the board of directors in improving reporting quality in the MENA context.Practical implicationsRegulators should adapt corporate governance mechanisms to the characteristics of the institutional context in which they are inserted.Originality/valueTo the best of the authors’ knowledge, this study is the first to examine the effect of various board characteristics on both types of earnings management practices in the MENA context. It also provides the first empirical evidence of the relationship between board gender diversity and earnings management in the MENA region.

The Nexus between Corporate Lyfe Cycle and Earnings Management at Companies Listed on the Bucharest Stock Exchange

This research investigates the nexus between the corporate life cycle (CLC) and accrual-based earnings management (AEM) and real earnings management (REM) practices. Companies listed on the main segment of the Bucharest Stock Exchange between 2007 and 2021 are analyzed through fixed effects and random effects models. The regression analysis uncovers that earnings management practices vary based on the developmental stage of the company. In the introduction stage, Romanian companies tend to prefer AEM techniques, while in the growth and maturity phases, REM practices are more prevalent. The conditions in which firms operate, the pressure from the capital market and the discretion over costs characteristic of each stage of development explain the preference for a certain method of earnings management. Overall, this investigation helps clarify CLC's role in adopting earnings management techniques (AEM/REM) and signals the need to pay particular attention to the quality of financial reporting of companies in the early stages of development. The findings hold significance for auditors, financial analysts, investors, lenders, and regulators alike.

Firm-specific investor sentiment and earnings management: evidence from Brazil

PropósitoEl propósito de este estudio es investigar la influencia del sentimiento de los inversionistas a nivel de empresa en la manipulación contable de las empresas brasileñas entre 2010 y 2018. El documento pretende aportar una visión más profunda sobre la relación entre las expectativas de los inversores y la toma de decisiones de los gestores en un mercado emergente.Diseño/metodologia/enfoqueusamos el enfoque cuantitativo y aplicamos un modelo de regresión lineal múltiple para probar la relación entre las acumulaciones anormales, el índice de sentimiento de los inversores a nivel de empresa y las variables de control. La muestra final incluye datos de 175 empresas, entre 2010 y 2018.HallazgosLos resultados revelan una asociación negativa entre el sentimiento de los inversores a nivel de empresa y la manipulación contable basada em acumulaciones, lo que podría significar que la propensión al riesgo de los administradores a manipular las ganancias aumenta cuando enfrentan pérdidas conocidas en el mercado de capitales.Limitaciones/implicaciones de la investigaciónlos resultados de la investigación proporcionan una valiosa comprensión de cómo las expectativas de los mercados de capitales emergentes pueden influir en las decisiones de gestión, como la manipulación contable basada en acumulaciones. El área geográfica de estudio se limitó únicamente a Brasil y, en consecuencia, los hallazgos y conclusiones del estudio tuvieron sus límites.Originalidad/valorestudios anteriores sobre mercados desarrollados muestran que el sentimiento de los inversores a nivel de mercado influye positivamente en la manipulación contable. Sin embargo, el presente estudio muestra que el índice de sentimiento de los inversores a nivel de empresa tiene una relación significativa y negativa con la manipulación de las ganancias de las empresas brasileñas, mientras que el sentimiento del mercado indica una relación contradictoria en estudios anteriores en el país.

EARNINGS QUALITY DURING COVID-19: CENTRAL ASIAN CASE

The purpose of this research. In 2021 Gong & Choi investigated the eff ect of State ownership on Accounting quality. Positive relationship between State ownership and Earnings management has weakened in recent years, which is the result of the eff ective mixed-ownership reform [1]. Our research is an event study to assess the impact of COVID-19 on the National IPO/SPO Program results in terms of Earnings quality changes in partial state-owned enterprises.Methodology. We analyze 572 unbalanced panel fi rm-year observations during 2009-2021period. Sample data is extracted from KASE Stock Exchange population across diff erent industries excluding fi nancial institutions and investment holdings. To estimate Earnings quality, we combine Kasznik cash fl ow model for accrual-based Earnings management and Roychowdhury aggregate model for real activity Earnings management [2; 3].Findings. We found that COVID-19 positively aff ected Earnings quality in partially state-owned companies and its eff ect was stronger compared to Earnings quality in 100 % owned private and state enterprises. Despite such the immediate and positive reaction, in post COVID-19 2021 year, Earnings quality deteriorated in partial state-owned companies (with 50-99 % Government ownership) up to the level of 100 % private/state companies.Originality / value of the research. Our study is among the fi rst attempts to analyze Earnings quality dynamics over 2009-2021 horizon in Kazakhstan with the assessment of COVID-19 impact. As a practical recommendation, our research fi ndings could be integrated into the National IPO/SPO Program as a red fl ag to impact Earnings quality trend in partial state-owned enterprises.

The Role of Audit Committee Interlocks in the Dissemination and Contagion of Accrual-Based and Real Earnings Management

We examine the effect of audit committee interlocks on the dissemination and contagion of accrual-based earnings management (AEM) and real earnings management (REM) for the pre- and post-SOX periods. We use “dissemination” to denote information association and “contagion” to designate causal information transmission. We first document that interlocked firms exhibit AEM dissemination (but not REM dissemination) for the pre-SOX period and REM dissemination (but not AEM dissemination) for the post-SOX period. To alleviate the concern that our results might be driven purely by the enactment of SOX, we perform a placebo-controlled falsification test, which shows that neither AEM nor REM dissemination exists in the absence of audit committee interlocks. To address the endogeneity concern that two similar firms with parallel accounting practices appoint the same director, we use an interlock initiation analysis and establish an AEM contagion effect for the pre-SOX period but no REM contagion effect for the post-SOX period. We also construct an AEM-REM substitution index. When information-sending firms substitute REM for AEM, information-receiving firms similarly switch. Collectively, while ease of detection and an increased level of scrutiny are listed as reasons for the shift from AEM to REM after the enactment of SOX, we contribute to the literature by showing that audit committee interlocks could be a viable mechanism in converting these motivations into actions and are a plausible factor in facilitating this transition from AEM to REM.

Does Corporate Social Responsibility Engagement Reduce Earnings Management? Evidence from Cambodian-Listed Companies

This research aims to explore the influence of ethics on financial reporting quality by investigating the correlation between corporate social responsibility (CSR) and accrual-based earnings management (AEM) within a sample of Cambodian non-financial listed companies over the nine years from 2014 to 2022. The study reveals that the level of involvement in AEM is lower in Cambodian firms, which have a higher tendency to engage in charitable activities. The study's findings hold significant implications as they contribute to a deeper understanding of financial reporting practices and CSR initiatives, which may interest stakeholders, including investors, regulatory bodies, and scholars interested in ethical business practices. Furthermore, it offers valuable insights into the ongoing debate surrounding the impact of ethics on the quality of financial reporting, particularly within emerging economies.

Earnings Management in Business Groups during the SARS-CoV-2 Pandemic

Abstract This paper aims to assess the influence of the SARS-CoV-2 pandemic on the accrual-based earnings management patterns in non-financial business groups in the Warsaw Stock Exchange (WSE). This study contributes to the existing literature by considering earnings manipulation behaviours in assessing the reporting data quality, both in consolidated financial statements of business groups and individual financial statements of parent undertakings. The research methods are based on the Modified Jones Model with the simultaneous separation of individual subcategories of accruals via cross-sectional analysis and time-series data approach (separately for each business group). Empirical findings supported the presumption that earnings manipulation schemes in the SARS-CoV-2 transitional (2020) and crisis (2021) periods differed statistically compared to the previous 2019 and 2020 years, respectively. Moreover, this article proved that the company‘s potential financial distress could imply accrual-based earnings management behaviours and moderate the association between the SARS-CoV-2 pandemic and earnings manipulations activities. Finally, the obtained results confirmed that although business groups have an expanded set of balance sheet policy instruments, the quality of earnings reported in the individual financial statements of parent undertakings and the consolidated financial statements of business groups were similar during the SARS-CoV-2 pandemic.

Managerial overconfidence and corporate information disclosure

By extracting detailed birth information for managers of Chinese listed firms from 2011 to 2021, we developed a novel measure of overconfidence and applied it to the corporate information disclosure. Our findings demonstrated a close association between managerial overconfidence and both mandatory and voluntary disclosure behaviors exhibited by firms. Specifically, managerial overconfidence significantly contributed to an increase in accrual-based earnings management and the voluntary disclosure of Corporate Social Responsibility (CSR) information by firms. Furthermore, we observed that overconfident managers were more inclined to adopt a positive disclosure tone and tend to underestimate future risks in forward-looking information disclosure. In our additional analysis, we uncovered evidence suggesting that various factors, including corporate governance practices, the types of actual controllers, financing constraints, analyst following, and market competition, might all play a role in influencing corporate information disclosure behavior driven by managerial overconfidence. This study expands on the economic implications of the Upper Echelons Theory and offers pertinent recommendations to enhance the quality of information disclosure.

The Influence of Cash Flows Volatility on The Relationship Between Leverage and Accruals Earnings Management

This study examines how cash flow volatility affects leverage and accruals earnings management. The research objective achieves by analyzing a sample of non-financial Pakistani enterprises from 2004 to 2018. The paper examines leverage and earnings management in business risk, specifically cash flow volatility. The leverage includes short term, long term, and total debt, while cash flows volatility is used as business risk. The earnings management level is measured by accruals earnings management also by using John Modified Model that suggests measuring earnings management approach by using discretionary accruals. This analysis uses agency and positive accounting theory. This study uses two-step system Generalized Method of Moment (SYS-GMM) dynamic panel estimators to examine leverage and earnings management. The study also examines how business risk affects this relationship for Pakistani enterprises. Endogeneity between variables motivates the adoption of SYS-GMM. The study found that leveraged managers use accruals earnings management. Leverage and accruals earnings management are positively correlated. The firm managers deliberately eschew accruals-based earnings management and leverage long-term debt. This choice is predicated on the unfavorable link between long-term debt and accruals earnings management. The leverage impacts negatively on accruals earnings management in the presence of cash flows volatility that discourage the managers to manipulate the financial statements. When seeking external finance, managers are less likely to use accruals-based earnings management when facing cash flow instability.

Earnings quality and national IPO: Central Asian case

Object: The study aims to assess the impact of the National IPO/SPO Program on Earnings quality in KASE-listed companies and provide recommendations to the investor community.Methods: KASE Stock Exchange sample population is 52 local companies, 26 state and 26 private, across different industries excluding financial institutions and investment holdings. Time horizon is 13 years during 2009‒2021 period totaling 572 unbalanced panel firm-year observations. To estimate Earnings quality, we follow (Kasznik, 1999) cash flow model for accrual based Earnings management jointly with real activity (Roychowdhury, 2006) aggregate model.Findings: We found that the National IPO/SPO process creates partial state-owned enterprises and improve their key investment indicators.Conclusions: Partially state-owned companies outperform private ones and thus become the preferable investment strategy based on Earnings quality risk, cash generation, profitability and leverage-based risk. Theoretically, this study is the first to analyze Earnings management from the National IPO/SPO perspective and the first to relate Earnings quality with structure ownership in case of Kazakhstan. Practically, results and discussion are useful for investors of KASE-listed companies in investment decision making.

The Earnings Management Strategy of Indebted Non-Listed Firms: The Case of Italy

Design/methodology/approach: For a sample of Italian non-listed firms that file full financial statements, we conduct a cross sectional regression analysis to determine whether the managers of indebted firms complement real activity-based (REM) with accrual-based (AEM) earnings management. To model each technique, we estimate OLS regressions with robust standard errors to avoid heteroscedasticity problems.Purpose: This research analyses whether the managers of highly indebted Italian non-listed firms, financed mainly by bank-loans, are likely to undertake real activity-based earnings management (REM) and accrual-based earnings management (AEM) as complementary activities to boost the impact of earnings management (EM) on reported earnings and achieve desired earnings targets.Findings: Consistent with the extant literature, we find that indebted firms are likely to complement REM with AEM to enhance their creditworthiness. We also provide evidence that high-quality audit companies constrain neither REM nor AEM initiatives. Finally, firms suffering from financial problems are less likely to engage in either initiative as they are under greater scrutiny from lenders.Originality: The paper investigates the complementary use of accrual-based and real activity-based earnings management techniques in non-listed firms, suffering from a high pressure from lenders in the case of indebtedness.Practical implications: This research should be of interest to banks, managers, and standard setters as it highlights the earnings management strategy employed by firms with a high leverage ratio and provides evidence on the relative costs associated with each earnings management technique.

Can enterprise green transformation inhibit accrual earnings management? Evidence from China

This study theoretically and empirically analyzes the impact and mechanism of corporate green transformation on accrual earnings management using a sample of China's A-share listed companies from 2015 to 2021. The results indicate that the green transformation of enterprises helps restrain accrual-based earnings management, especially accrual-based earnings management, which increases profits, and that the inhibition effect of enterprise green transformation on earnings management is more significant in high-tech and growth-stage enterprises. The mechanism test shows that corporate green transformation can inhibit accrual-based earnings management by increasing analyst follow-up and easing financing constraints. Using China's environmental tax law, promulgated in 2018, as an exogenous shock to construct the PSM-DID, the conclusion still holds after alleviating endogeneity. Further research has found that green transformations can also help inhibit real earnings management. This study provides new empirical evidence for a comprehensive understanding and evaluation of the governance role of corporate green transformation and provides a reference value for further comprehensively promoting the green transformation of Chinese enterprises and improving the quality of accounting information.

The moderating role of CSR in the relationship between earnings management and cost of equity: evidence from European ESG data

PurposeThe present work aimed to identify the impact of accrual-based earnings management on the cost of equity (KE) through corporate social responsibility (CSR) as a moderating variable on European Environmental, Social, and Governance (ESG) companies.Design/methodology/approachThe authors used data from a sample of 366 European firms over the 2012–2022 period. The data were collected from the Thomson Reuters Asset 4 and I/B/E/S database and analyzed using STATA 17 as a statistical software package.FindingsAs expected, the results showed a negative relationship between accruals, CSR and KE. Moreover, they suggest that the moderating variable negatively affects the relationship between accruals and the KE.Practical implicationsThe results are pertinent to stakeholders and investors, who would pressure companies to enhance the quality of disclosed information and mitigate risks facing the company.Originality/valueThe main contribution lies in examining the relationship between accruals and KE through CSR in the European ESG context.