Aggressive Earnings Management Research Articles

Aggressive Earnings Management And Stakeholders Protection In Profit Listed Organizations

Investors want to know that their interests come first, thus they place a high value on the public perception of the companies in which they have invested. The problem of stock market and share price performance, which is a major concern for shareholders and investors in the Nigerian capital market and indeed any other stock markets, is unpredictable. This study investigated the relationship between aggressive earnings management and shareholders' interest in profitable publicly listed corporations. The study employed an ex-post facto research design. The population of the research consisted of 35 manufacturing companies listed on the Nigerian Exchange Group as of December 31, 2020. Purposive Sampling technique was adopted to select 10 companies from 2011- 2020. Data were obtained from publicly available yearly reports, and they were certified by the NSE and outside auditors. Both descriptive and inferential statistics were utilized to analyze the data using regression analysis. According to the findings, aggressive profits management had no discernible effect on business protection (FStat (2,97)=11.994, p > 0.05, Adj R2=0.43), but it had a discernible effect on creditors' protection (F- Stat (2,97)=2.74, p <0.05, Adj R2=0.39). In contrast, based on the study's findings, it was advised that management of businesses develop measures to help increase their profitability, which would in turn have an effect on shareholders' return on equity and earnings per share. Significant relationships between discretionary accruals, unusual production costs, and irregular levels of operational cash flow and stakeholders' interest in profit-listed firms were discovered. Second, business owners should use profits measurement methods that have been validated via testing on a global scale, like the numerous indicators included in this study that were gleaned from accounting and finance literature

Geopolitical conflict and firm bankruptcy risk

This study examines the impact of geopolitical risk on corporate bankruptcy. We utilize a global dataset of 36,802 firms from 42 countries covering 2004-2022. Our baseline result indicates that geopolitical risk increases firm bankruptcy risk. Our results remain robust after controlling for endogeneity using 2SLS, propensity score, and entropy balancing techniques, as well as using alternative proxies. Our analysis shows that high cash flow and strong creditor rights help mitigate bankruptcy risk, while high leverage and aggressive earnings management stimulates it. Our findings provide insights for policymakers and industry practitioners to formulate effective strategies to mitigate bankruptcy risk in globalization.

Bank Competition, Loan Portfolio Concentration and Stock Price Crash Risk: The Role of Tone Ambiguity

AbstractWe examine the association between loan portfolio concentration, competition and stock price crash risk in the US banking industry. We find that during economic downturns, banks with poorly diversified loan portfolios that operate in competitive markets are more likely to crash. Importantly, we show that this link is channelled through aggressive earnings management and ambiguous annual reports. Therefore, managerial ambiguity can serve as an early warning signal of information obfuscation, which can eventually lead to stock price crashes. As a quasi‐natural experiment, we use the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018. This policy lowered the regulatory requirements and oversight for a specific group of large banks. The results of a difference‐in‐differences analysis support our baseline findings and add to the ongoing debate on the roots of the 2023 banking crisis. Therefore, our findings can be informative to market participants, regulators and policy makers.

A quantitative study on the effectiveness of the governance attributes on ‘industry-wise earnings quality’ in the UK

Despite of positive impacts of the earnings management on the business purposes, many businesses have been suffered due to the audit failures as a result of aggressive earnings management. Therefore, the study on true reflection of earnings management, the controlling factors and how aggressively manipulated earnings quality can be mitigated are the areas of concern these days. For the estimation of earnings management, performance matched discretionary accruals model has been implemented as this model has been identified as the best explanatory models. Thereafter, this research has accumulated the sector-wise earnings management to identify the impact of sectors on the sectorial earnings management. There are eleven different industries involved in the research while four of them have revealed that the managers from certain sectors have got involved in the aggressive earnings management. Further, this research has investigated the impact of the attributes of the corporate governance on the sector-wise earnings management. the variables of corporate governance like managerial ownership, block-holders, institutional ownership and non-executive directors’ fees have significant impact on sector-wise earnings management where other variables like board meeting, board size, number of female members on the board, board independence have not been identified as they have significant impact on controlling earnings management. Univariate and multivariate methods are used to demonstrate the results and to establish the inferences of the outcomes of the research. The use of coefficients (β -value) and p-value are much prominent in this study.

How does earnings management impact annual report readability?

This research investigates the relationship between earnings management and annual report readability for companies listed on the Singapore Stock Exchange (SGX). Research on earnings management (EM) and the ability to read the annual report play a crucial role for investors as well as other stakeholders. The extent of earnings management can be determined based on annual reports. The analysis is based on the data of 251 domestic companies listed on the SGX from 2016 to 2021. Regression analysis of panel data was conducted using STATA version 15 software in this research. The result shows that companies with more aggressive earnings management tend to make annual reports more complex and, hence, less readable. In addition, the study also shows that the impact of earnings management on the annual report readability for enterprises of different sizes, profits, ages, and levels of financial distress is the same. Theoretically, the findings of this research for a developed financial market in Asia (Singapore) further confirm and reinforce the findings about the relationship between earnings management and report readability. In addition, one may draw important practical implications for investors as well as stakeholders in general; in particular, stakeholders may have more evidence for suspicions about earnings management whenever the annual reports become more difficult to read and understand.

Ethnicity-based director network and earnings quality

ABSTRACT We exploit the ethnic value differences in Malaysia to investigate the role of ethnicity-based director network in earnings management. Using various centrality measures from social network analysis, we map the ethnicity-based network of 4,416 directors for a sample of 734 listed firms. Our results show central directors are associated with more aggressive earnings management, suggesting that the reciprocal relationships created by the network allow central directors to learn about earnings management techniques and/or to gain better resources to facilitate earnings management techniques. Whilst firms with more central directors in either the Bumiputera or non-Bumiputera network show a greater propensity to engage in earnings management, those in the non-Bumiputera network exhibit more aggressive earnings management practices.

Asset Volatility and Financial Sustainability

This study observes how companies’ fundamental-based asset volatility impacts their financial sustainability. Accounting literature documents that net assets value accumulates previous earnings management. The asset balance change reflects biased earnings measurement, and abnormal asset fluctuation signals aggressive earnings management. This paper uses delisting as a proxy to observe how asset volatility can interact with abnormal earnings fluctuation to impact firms’ sustainability. The study uses two groups of regression and a Principal Component Analysis (PCA) Logistic Regression approach to observe how asset volatility impacts companies’ delisting risk. It borrows the Six Sigma methodologies to measure the volatility of financial statement items. Then the PCA analysis reduces the data dimensions to twelve factors. The analysis shows that assets’ abnormal fluctuation is a risk signal concurring with the extant earnings management literature. One takeaway from this study is that companies must disclose detailed explanations if asset volatility is beyond a red line. As Statement of Financial Accounting Standards (SFAS) 151 requires direct disclosure of abnormal excess capacity costs, companies must disclose abnormal asset volatility. The paper contributes to the literature from two perspectives. First, this paper captures firms’ sustainability from the accounting perspective with fundamental measures from quarterly financial reports. It provides a comprehensive way to detect aggressive earnings management risks. Second, the PCA logistic regression model offers a comprehensive analysis to derive useful information from many attributes.

CEO Type and Earnings Management to Avoid Loss or Earnings Decreases: Evidence from South Korea

This study examines the relations between the CEO type (owner CEO vs. professional CEO) and earnings management over 9,266 firm-years from 2011 to 2020 in Korea. Two earnings management measures, accrual management and real activity management (abnormal cash flow from operations, abnormal production cost, and abnormal discretionary expense), are considered as means to avoid reporting losses or earnings decreases. We partition the sample into two groups based on the type of CEO (owner CEO vs. professional CEO) and investigate whether earnings management is used for achieving earnings targets (small profit or small earnings increases) for each group. We find all earnings management measures are significant at the 5% level or better in the direction of aggressive earnings management in the owner CEO sample, while all but one measure (abnormal production cost) are insignificant in the professional CEO sample. Our findings suggest that an owner CEO is more likely to manage earnings to achieve small profit or small earnings increases compared to a professional CEO.

Earnings Management Behavior of Firms with Financial Constraints: Focusing on Firms that Issue Redeemable Convertible Preferred Stocks

Purpose: T his study aim s to e xplore t he e ffect of f inancial c onstraints o n earnings m anagement by f ocusing on firms that issue redeemable convertible preferred stocks (RCPS). RCPS are considered a financing option primarily used by firms that have investment opportunities but face difficulties in raising funds with a low cost of capital. Therefore, the issuance of RCPS can be an effective indicator to identify firms with financial constraints. Design/methodology/approach: This study employs a sample of 12,406 firm-year observations of listed companies in the Korean stock market from 2011 to 2018. The study conducts multiple regression analyses to investigate the level of earnings management of RCPS-issuing firms with respect to that of non-issuing firms. In this analysis, the earnings management is proxied by discretionary accruals and real operational activities. Findings: This study shows that RCPS-issuing firms have a higher level of discretionary accruals than non-issuing firms. Meanwhile, there is no significant difference in the level of real activities management between RCPS-issuing and non-issuing firms. These findings imply that firms with financial constraints engage in aggressive earnings management through discretionary accruals rather than real operational activities. Research limitations/implications: This study provides compelling evidence that financially constrained firms strategically use discretionary accruals to signal positive prospects for external capital suppliers, allowing them to raise the capital necessary for investment. It is also confirmed that financially constrained firms do not depend on real activities management, which sacrifices cash flows and firm value in the long run. Originality/value: T his is t he f irst s tudy t o test t he l ink between f inancial c onstraints a nd e arnings m anagement by analyzing RCPS-issuing firms that conform to the definition of financial constraints. This approach can alleviate the risk of errors in the classification of firms and the endogeneity problems accompanied by estimating financially constrained firms with firm characteristics, such as dividend payout ratio, cash flows, size, age, or a combined index of these variables.

COVID-19: Accrual Earnings Management Practices in Pharmaceutical Companies in Indonesia

The COVID-19 pandemic has disrupted the supply chain of domestic pharmaceutical raw materials, where 95% of the fulfillment of raw materials relies on imports. Amid difficulties in meeting raw materials, the pharmaceutical sub-sector companies have become one of the sectors of choice for investors throughout 2020, in line with the sentiment of the COVID-19 pandemic. As one of the prima donnas’ sectors during pandemic, financial reports presented by pharmaceutical sector should report the actual condition of the company. This study aims to empirically examine the differences in accrual earnings management before and after the COVID-19 pandemic in pharmaceutical sub-sector companies in Indonesia. To evaluate changes in accrual earnings management in the period before the COVID-19 pandemic, namely in 2019 and after the COVID-19 pandemic, namely in 2020, the Paired Sample T-test was used. The findings of this study show that there is no average difference between accrual earnings management before COVID-19 (Pre-test) and after COVID-19 (Post-test), indicating that COVID-19 has no impact on earnings management practices in the pharmaceutical sub-sector companies in Indonesia. The deteriorating global economic conditions caused by the COVID-19 pandemic do not necessarily encourage managers to carry out aggressive earnings management. The pharmaceutical sub-sector companies that have become the center of attention of investors during this pandemic, as a result the company’s performance shown in the financial statements does not make managers aggressively try to manipulate their financial statements.

Earnings Management and Corporate Performance in the Scope of Firm-Specific Features

Various models have been created all around the world to identify enterprises that manipulate their earnings. These earnings management techniques aid businesses in enhancing their financial performance or gaining some competitive advantages. The primary goal of this article was to identify the firm-specific characteristics that affect how businesses manage their earnings using a sample of 15,716 businesses from various economic sectors in the Slovak environment during a 3 year period. The level of earnings management was measured by discretionary accruals using the Kasznik model. In this paper, a correspondence analysis using the chi-square distance measure was applied to find the dependence between the earnings management practices and firm-specific features (firm size, legal form, and sectoral classification). The results of the study indicate that aggressive (income-increasing) earnings management practices are typical of small enterprises with a public limited ownership structure, mostly in sectors R and M (using the NACE sectoral classification). Conservative (income decreasing) practices can be observed in enterprises in the sectors J or F, and they are also used by medium-sized enterprises and those with private limited ownership structure. The results revealed that large enterprises do not tend to manipulate their earnings, as well as enterprises operating in sector K. The insights of this study may provide important and useful information for shareholders and regulators in evaluating determinants that are effective in mitigating earnings management practices. Authorities, regulators, analysts, and auditors may find the importance of the discovered variances helpful in identifying various strategies and techniques for earnings manipulation that may differ among industries according to their typical characteristics.

Institutional investors and earnings management associated with controlling shareholders' promises: Evidence from the split share structure reform in China

We examine the effectiveness of institutional investors in constraining aggressive earnings management induced by strong contractual incentives. To this end we focus on the consequences of earnings-related promises (covenants) negotiated between corporate controlling shareholders and minority shareholders during China’s split-share structure reform, wherein failure to achieve profit benchmarks had the potential to transfer significant wealth from controlling to minority shareholders. Our initial analysis provides evidence that profit-promised firm-years are, on average, associated with income-increasing earnings management, and that this association is stronger for: (i) firm-years in which the profit-promise was satisfied, and (ii) firm-years in which proxies for the level of unmanaged earnings suggest that earnings management was needed to satisfy the promise. However, such benchmark-beating behavior is weaker for firms with higher levels of institutional ownership. Further analysis documents that the exit threat of institutional shareholders can discipline earnings management associated with profit promises. We also show that the effect of institutional shareholders in reducing earnings management associated with profit promises is greater for domestic mutual funds and for privately controlled firms. Interestingly, our evidence suggests that institutional investors only play an effective monitoring role over earnings management when their incentives are strongly aligned with those of other minority owners. In other cases, our evidence suggests that these investors may exacerbate the level of earnings management.

Human Capital Diversity and Relevance of Accounting Information of Quoted Manufacturing Companies in Nigeria

Relevance of accounting information has been beset with the major problem of unethical practices such as aggressive earnings management, non-compliance with company’s corporate governance, and unhealthy focus on making the financial statements look attractive which seems prevalent in the quoted manufacturing companies in Nigeria. These incidentally affect the companies reporting and also have a major impact on various human capital diversity. On the other hand, most financial reports do not indicate cogent factors that affect financial condition and the components of human capital diversity. The study investigated the effect of human capital diversity on relevance of accounting information of quoted manufacturing companies in Nigeria.The study employed survey research design. The population of the study was two thousand nine hundred and seventy employees of quoted manufacturing companies on the Nigerian Stock Exchange (NSE). Stratified and purposive sampling technique were used and a total of six hundred and seventy (670) were distributed out of which 600 copies were properly filled and returned representing 89.55% success rate. The Cronbach Alpha reliability coefficient range between 0.710 and 0.972. The data were analysed using descriptive and inferential (multiple regression )statistics.The study found that human capital diversity has significant effect on the relevance of accounting information Adjusted R 2 = 0.250 ; (F 4, 449) = 59.5, p < 0.05) . The study concluded that human capital diversity has significant effect on the relevance of accounting information of manufacturing companies in Nigeria. The study recommended that governments and its agencies should provide good environment for human assets to showcase their diversity through political influence, religious influence, social influence, and intellectual influence to enhance quality provision of relevant of accounting information. Keywords: Financial Information, Financial Reporting Quality, Human Capital Diversity, Manufacturing Companies, and Non-financial information DOI: 10.7176/RJFA/13-10-01 Publication date: May 31 st 2022

The Nexus between Aggressive Tax Planning and Earnings Management in different Political Systems and the Moderating Role of Corporate Governance

The Nexus between Aggressive Tax Planning and Earnings Management in different Political Systems and the Moderating Role of Corporate Governance

Short Seller, Firm, and Auditor Behavior

Purpose: Although a small part of arbitrage trading, short selling has a significant impact on capital markets. This study empirically examines relationships among short selling, earnings managements, and auditor behaviors. Design/methodology/approach: We employed short selling and abnormal short selling as independent variables. Audit hours, audit fees, and (absolute) value of discretionary accruals as dependent variables. In this study, we basically include ordinary least-squares regression analyses using panel data and interaction analyses. Findings: This study verifies the relationship among short selling, firm earnings management, and auditor behavior, showing positive relationships between short selling and current and future audit fees, audit hours, and current audit quality. Further, higher audit risk, caused by the interaction between abnormal short selling and aggressive earnings management, is reflected in future audit fees and hours. Research limitations/implications: Due to the financial data provided on an annual basis, the daily short selling data was aggregated on an annual basis. This study suggests that short selling is related to firm earnings management behavior, as well as to the auditor behaviors. Therefore, regulators should consider the impacts of short selling on company and auditors as well as investors. Originality/value: This study provides evidence that the positive relationship between short selling and audit fee is not only caused by risk-premium channels, but also by audit-effort channels. Furthermore, we find that the interaction effects of short selling and earnings managements occur only in abnormal short selling. This seemed to impose penalties on short selling exceeding forecasts when auditors considered earnings managements and short selling at the same time.

Audit Market Competition and Audit Clients’ Use of Accrual-based versus Real Earnings Management

This study investigates how the level of audit market competition influences audit clients’ use of earnings management tools. Specifically, this study examines whether clients use more or less accrual-based earnings management than real earnings management when the competition among auditors intensifies. We use 16,793 firm-year observations collected from Korean stock market for the empirical analyses, and the audit market competition is measured by the number of auditors providing audit service in a specific year and industry. The results are summarized as follows: First, clients use more accrual-based earnings management as audit market competition intensifies, suggesting that auditors allow clients’ aggressive earnings management to overcome intense competition. Because there is a substitutive relation between accrual-based and real earnings management, the magnitude of real earnings management decreases as the competition intensifies. Second, we find that the fierce audit market competition is more likely to decrease real earnings management and increase accrual-based earnings management when the client firms have strong incentive to manipulate earnings. The findings clearly show the detrimental role of intense audit market competition. Based on the findings of this study, regulators should be more careful to set up policies to promote more competition in the audit market.

Does industry expertise at engagement partner and audit firm level matter in emerging market? Evidence from Indonesia

This study investigates the association of industry specialization at the engagement partner level and audit firm level with aggressive earnings management and modified audit opinion. The study employs a sample of 570 firm-year observations of manufacturing industries on the Indonesia Stock Exchange from 2014 to 2018 using a binary logistic regression model. First, this study finds no evidence of a relationship between industry specialization at the engagement partner level and audit firm level with aggressive discretionary accruals. Furthermore, the author finds evidence of a positive association between industry specialization at the audit firm level and aggressive real earnings management due to high audit quality. Finally, the study finds evidence that industry specialization at audit firm level is likely to issue modified audit opinion. This study contributes to the study of industry specialization at the engagement partner level and audit firm level, which is rarely performed in Indonesia. Policy makers and capital market players might learn some lessons from the audit quality of external auditors with industry specialists as the gatekeeper of the capital market. Moreover, this study has provided a valuable perspective to practitioners, researchers, and policy makers in other emerging markets regarding the quality of industry specialization at the partner and audit firm level.

Loan loss provisions, earnings management, capital management, and signalling: the case of Vietnamese banks

This study examines loan loss provision (LLP) behaviours of Vietnamese banks between 2006 and 2015. The findings show that earnings management is positively related to LLP regardless of the restructuring period, suggesting that LLPs can be used by Vietnamese banks as a mechanism for aggressive earnings management. There appears to be no capital management before the restructuring period. However, the findings indicate that Vietnamese banks use capital management with LLP during the restructuring period. Furthermore, the positive relation between LLP and future earnings during the restructuring period suggests that investors may view an abnormal increase in LLP as a signal of loan quality. The findings further demonstrate that LLP is positively associated with bank inefficiency, credit growth, bank size, and lending specialisation. State-owned commercial banks are found to reserve a greater level of provisions compared to privately owned commercial banks. Based on the research findings, we offer several implications for relevant stakeholders.

THE IMPACT OF AUDIT QUALITY, AUDIT COMMITTEE AND FINANCIAL REPORTING QUALITY: EVIDENCE FROM MALAYSIA

In recent decades, there has been a noticeable increase in the practice of earnings management as a proxy for financial reporting, especially real activities, with effect on the quality of financial statements. The role of the audit committee in mitigating earnings management remains ambiguous because of inconclusive findings. Therefore, this study examines the moderating effect of audit quality and audit committee on financial reporting quality, also known as REM inn Malaysian companies. The results show that corporate governance mechanism such as financial accounting expert, meeting and indicate significant results with real earnings management while, audit committee independence and size, shows an insignificant result on real earnings management. In addition, the results show that audit quality of the audit committee leads to less aggressive earnings management practice in real activities. The findings also show that audit quality and audit committee has a significant role in restricting the real earnings management. Audit quality is found to significantly moderate the relationship between audit committee with financial reporting quality proxy. Overall, this study provides a reference point for the relevant parties such as regulatory bodies, policymakers and standard setters towards improving the quality of earnings and corporate governance practices in ensuring credible accounting information.Keywords: audit committee effectiveness, audit quality, real earnings management, MalaysiaJEL Classifications: G3, M42DOI: https://doi.org/10.32479/ijefi.10136

An Investigation on the Impact of Audit Quality, Audit Committee and Financial Reporting Quality: Evidence from Malaysia

Purpose of study: In recent decades, there has been a noticeable increase in the practice of earnings management as a proxy for financial reporting, especially real activities, with effect on the quality of financial statements. The role of the audit committee in mitigating earnings management remains ambiguous because of inconclusive findings. Therefore, this study examines the moderating effect of audit quality and audit committee on financial reporting quality, also known as REM in Malaysian companies. Methodology: The study utilized the multiple regression analytical technique approach with 2,226 firm-year observations of non-financial firms listed on the Bursa Malaysia over a six-year period from 2013 to 2018.Results:The results show that corporate governance mechanism such as financial accounting expert, meeting and indicate significant results with real earnings management while, audit committee independence and size, shows an insignificant result on real earnings management. In addition, the results show that audit quality of the audit committee leads to less aggressive earnings management practice in real activities Implication/Application: The findings also show that audit quality and audit committee have a significant role in restricting the real earnings management. Audit quality is found to significantly moderate the relationship between audit committee with financial reporting quality proxy. Novelty/Originality of this study: This study provides a reference point for the relevant parties such as regulatory bodies, policymakers and standard setters towards improving the quality of earnings and corporate governance practices in ensuring credible accounting information.