Corporate Earnings Management Research Articles

Noncontrolling shareholders' network centrality and corporate earnings management: Governance or conspiracy?

Corporate governance is undermined by the tunneling of controlling shareholders. Social networks play a positive role in corporate governance; hence, the question is whether noncontrolling shareholders can take advantage of their network position to participate in corporate governance and subsequently influence earnings management. Our findings indicate that noncontrolling shareholders' network centrality can impede positive accrual-based earnings management and primarily functions as a governance mechanism via external governance. Also influencing the relationship between positive accrual-based earnings management and noncontrolling shareholders' network centrality are the religious culture in different regions and the nature of corporate property rights. Our study contributes to the debate about the role of noncontrolling shareholders by providing direct evidence that the network centrality of noncontrolling shareholders plays an active role in enhancing corporate governance and accounting information quality.

Smart city and earnings management: Evidence from China.

Smart cities improve services for businesses, among many other benefits. A comprehensive understanding and effective utilization of these advantages is crucial for promoting business development. Using panel data from Chinese listed companies (2010-2020), this study employs a multi-stage DiD model to investigate the impact of smart cities on corporate earnings management. The findings indicate that the smart city pilot policy has significantly reduced corporate earnings management. Further analysis suggests that smart cities primarily reduce earnings management by improving firms' external information environments. Additionally, the results show that the policy impact of smart cities is more significant in regions with lower regulatory intensity or higher marketization levels, compared to regions with higher regulatory intensity or lower marketization levels. Similarly, firms in less concentrated markets or those more closely related to smart city development tend to experience greater reductions in earnings management due to smart city construction, unlike firms in more concentrated markets or those less involved. Finally, this paper offers several brief suggestions.

The impact of ERP utilization and ESG practices on earnings management—An empirical study of Taiwan

Enterprise Resource Planning (ERP) system utilization and Environmental, Governance, Social (ESG) practice incorporation have jointly wielded significant influence on various aspects of accounting operations. On the other side, leveraging the robust information infrastructure, Taiwanese firms have widely implemented ERP systems and have been aligning with international ESG initiatives in recent years. The objective of this study is to investigate the impact of ERP utilization and ESG practices on real and accrual earnings management among firms listed in Taiwan over an 19-year span from 2003 to 2021. The results of this study suggest duration of ERP implementation has a negative impact on accruals earnings management, but has a positively influence on real management. The results underscore the significant influence of ERP utilization duration on the different aspects of corporate earnings management activity. Additionally, our investigation illustrates a negative association between the corporate assimilation of ESG practices and both real and accrual earnings management. This reveals that enterprises committed to implementing ESG practices highlight long-term substantive operations over the short term periodic performance of financial statements.

How does ESG constrain corporate earnings management? Evidence from China

This paper explores whether and how ESG can constrain firms’ earnings management behavior in China. We find that firms with higher ESG performance are less likely to engage in earnings management. Firm visibility and managerial ownership strengthen the ESG-EM negative relationship, while managerial overconfidence weakens it. To further reveal the underlying mechanism, we find that the constraining effect of ESG performance on earnings management is partially mediated by attracting more analysts. Different from the existing explanations of reducing information asymmetry and ethical perspective, this study sheds new light on the mechanism of ESG's regulating corporate opportunistic behavior in China.

The Unintended Consequence of Environmental Regulation: Evidence from Corporate Earnings Management

The Unintended Consequence of Environmental Regulation: Evidence from Corporate Earnings Management

기업의 ESG 활동이 이익조정에 미치는 영향

[Purpose]This study emphasizes the importance of ESG (Environmental, Social, and Governance) management, proposing that it provides incentives for companies to achieve transparent and sustainable management. The study aims to analyze the impact of ESG management on corporate earnings management, particularly focusing on the effect of one financial characteristic, the Return on Sales (ROS), and how ESG influences this relationship. [Methodology]The study utilizes ESG rating data publicly disclosed by the Korea ESG Standards Authority from 2015 to 2022, focusing on manufacturing companies with available ESG ratings. The discretionary accruals were measured using the Jones model as the earnings management variable, and ROS was used to reflect financial characteristics. [Findings]The study found that ESG management tends to reduce corporate earnings management activities. Moreover, while companies with higher ROS were found to engage in more earnings management, the interaction between ROS and ESG management, particularly in terms of ESG integration, environmental (S), and governance (G) components, showed a negative relationship with earnings management. This suggests that ESG management contributes to reducing earnings management. [Implications]The study suggests that ESG management plays a crucial role in enhancing financial transparency and ethical standards in corporations. It was observed that companies with higher total sales profitability, when implementing ESG management, tend to show a decrease in earnings management activities. This indicates that ESG management can be a vital tool for enhancing financial soundness and transparency.

Do alumni relationships between executive directors and auditors matter for financial reporting quality?

ABSTRACT This paper examines the impact of executive director-auditor Guanxi on Chinese listed firms’ financial reporting quality from 2009 to 2019. We identify Guanxi-connected auditors as those who attend the same university as the client firm directors. Using a fixed-effect model, we provide consistent evidence that alumni ties between auditors and executive directors are positively related to corporate earnings management, indicating that auditors are more willing to trust clients and less likely to challenge their financial reporting decisions. Subsequently, client firms have more incentives to manipulate earnings, and financial reporting quality is reduced. Our study also finds that the positive impact of director-auditor ties on earnings management is greater among non-state-owned enterprises, firms that do not recruit big-four auditors, and those with fewer industry specialist auditors. Our study sheds new light on the impact of Guanxi-connected auditors on financial reporting quality, enhancing our understanding on the role of social ties. Highlights Alumni ties between auditors and executive directors are positively related to earnings management. Such a positive relationship is greater among non-state-owned enterprises. Such a positive relationship is more pronounced for firms that do not recruit big-four auditors. Such a positive relationship is more pronounced for firms with fewer industry specialist auditors.

Corporate earnings management strategy under environmental regulation: Evidence from China

In response to external adverse factors affecting corporate performance, managers may be motivated to engage in earnings manipulation. Environmental regulation as an institutional factor threatens normal earnings for heavy-polluting firms. This paper discusses corporate earnings management strategy under an environmental regulation policy. A multistage difference-in-differences (DID) estimation is performed, based on the central environmental protection inspection (CEPI) that is widely acknowledged as China's most stringent environmental policy. The results show that heavy-polluting firms significantly adjust their earnings management strategy after CEPI. Managers tend to adopt real activities manipulation with the effects of CEPI, while reducing their reliance on accrual-based earnings management. CEPI stimulates heavy-polluting firms to increase environmental investment, which makes their managers more likely to manage earnings through real activity manipulation, simultaneously resulting in the reduction of discretionary accruals. This earnings management strategy only appears in firms inspected in 2016 or non-state-owned enterprises or firms located in the regions with low environmental pressure. Our findings show that managers could use the chances provided by exogenous shocks to manipulate earnings.

The Impact of Government Participation in Ecological Championship on Heavily-Polluting Corporate Earnings Management: Evidence from China’s National Civilized City Award

This study investigates the response of heavy-polluting firms to the political costs associated with local government participation in the ecological championship, with a specific focus on China’s National Civilized City Award. Employing the fourth national civilized city selection as a quasi-natural experiment, the results reveal that heavy-polluting firms in cities with the prestigious National Civilized City Award title engage in income-decreasing earnings management to respond to rising political costs resulting from the National Civilized City Award campaign. Our findings are robust across various sensitivity analyses. Furthermore, we identify that the impact of the National Civilized City Award campaign on corporate earnings management is particularly pronounced among sub-samples characterized by non-state ownership, high visibility, and strong incentives for promoting local officials. Our study further elucidates that the increased political costs faced by heavy-polluting firms can be attributed to the local government’s efforts to subject them to more stringent environmental enforcement to pursuing the honor of National Civilized City Award. This study contributes to the existing literature on the political cost hypothesis and provides a new perspective for understanding the impact of environmental regulation on corporate.

Analysis of the role of the independent auditor on reducing time lags in financial reporting and earnings management

ABSTRACT
 This study aims to analyze differences in the timeliness of financial reporting and earnings management in terms of auditor quality in manufacturing companies on the Indonesia Stock Exchange. based on the purposive sampling technique, a sample of 37 companies was obtained so that for 3 years of observation the data processed were 111. The hypothesis was tested using the Independent Samples Test different test. The results showed that there was no difference in the level of audit delay between companies audited by big four auditors or not. Meanwhile, the level of corporate earnings management audited by the big four or not the big four shows different results. This shows that the role of independent auditors in reducing earnings management is successful.
 
 Keywords: Auditor Quality, Audit Delay and Earnings Management

Individual investors matter: The effect of investor-firm interactions on corporate earnings management

On January 1, 2010, the Shenzhen Stock Exchange (SZSE) in China launched an online interactive platform named “Hudongyi.” This platform enables individual investors to communicate directly with executives of firms listed on the SZSE, under the supervision of the SZSE, thereby providing a quasi-natural experiment to study the impact of individual investors on corporate governance. Employing a difference-in-differences design, we document that the investor-firm interactions on Hudongyi deter real earnings management by firms listed on the SZSE through reducing information asymmetry and raising reputational costs. This effect varies with posting specificity, interaction effectiveness, and firm features. These findings suggest that individual investors can effectively engage in corporate governance when their right to speak up is facilitated by proper technology and regulatory scrutiny.

Application of gender and optimizing the function of the board of commissioners in supervising the practice of corporate earnings management

The urgency of this research is importantto empirically examine the impact of the characteristics of the board of commissioners on earnings management practices in Indonesia by considering gender diversification factors in optimizing the supervisory function of the company's board of commissioners. The sampling method used is purposive sampling with specific criteria on companies listed on the IDX with a research period of 2018-2019 with a total sample of 368 firm years of observation. The results showed that the independence of the board of commissioners was not proven to affect accrual earnings management. However, it was proven to have a negative effect on real earnings management practices. In addition, the size of the board of commissioners is proven to have a positive effect on accrual earnings management and company real earnings management. The role of gender diversification in reducing earnings management practices is proven. Three or more female commissioners can reduce accrual earnings management practices and increase real earnings management practices in companies. In addition, the role of gender diversification is not proven to strengthen the negative effect of the independence of the board of commissioners on earnings management. However, the role of gender diversification where there are three or more people in the size of the company's board of commissioners can further reduce accrual earnings management and real earnings management.

Local government debt and earnings management: evidence from China

PurposeThis study examines the effect of local government debt (LGD) on corporate earnings management using 25,624 firm-year observations from 2007 to 2019.Design/methodology/approachPooled ordinary least squares (OLS) regression is used to examine the impact of LGD on earnings management. A difference-in-differences (DID) method is also used to alleviate potential endogeneity.FindingsResults show that LGD motivates firms to increase earnings management, especially income-decreasing earnings management. Findings are robust to DID method and robustness tests. Heterogeneity analyses show that the positive effect of LGD on earnings management is pronounced in firms with political dependence and moderated by external governance mechanisms. Further discussions indicate that tax enforcement is an underlying channel for LGD to affect earnings management. Firms engage in downward real earnings management by increasing their abnormal discretionary expenditures and higher LGD leads to a greater book-tax difference in those firms that manipulate income-decreasing earnings management.Originality/valueThis study contributes towards examining the political costs hypothesis, the microeconomic effects of LGD and the determinants of earnings management.

How Environmental Protection Tax Affect Corporate Earnings Management——Evidence from Chinese Manufacturing Industry Enterprises

This paper empirically explores the influence of environmental protection tax on corporate earnings management and the underlying mechanism based on the data of manufacturing enterprises listed on A-shares in China from 2007 to 2021. The results show that environmental protection tax has a remarkable inhibitory effect on corporate earnings management, and the positive moderating effect of green innovation and the negative moderating effect of media attention are examined through mechanism analysis. The heterogeneity analysis finds that this effect can differ significantly depending on the nature of ownership, social responsibility, and environmental pollution, and through further research, it is discovered that the environmental protection tax has a more significant inhibitory influence on upward earnings management.

The Impact of the Environmental Protection Tax Law on Earnings Management

The Environmental Protection Tax Law of China was officially implemented on January 1, 2018. The pollutant discharge fee system has since been replaced by a more mandatory and restrictive tax law. The environmental fee-to-tax reform is an essential portion of the development of the green tax system in China, and it is tasked with the vital aim of promoting the sustainable development of Chinese economy. This paper takes the implementation of the EPT Law as a quasi-natural experimental material and employs the difference-indifferences model and other empirical models to examine the differences in corporate earnings management before and after the policy shock for A-share listed Chinese companies from 2015-2021. The empirical results show that the implementation of the EPT Law effectively promotes Chinese firms to conduct income-decreasing earnings management and such an impact has a greater effect on SOEs, large-size firms and firms in developed regions. Moreover, according to the mediating effect analysis, this paper also identifies that the above promotion impact can be attributed to media attention. The above results show that Chinese government still needs to further optimize this tax law and focus on the coordination between different environmental policies to facilitate sustainable development. Therefore, this paper proposes policy recommendations from four perspectives: corporate governance, accounting standards, environmental laws and regulations, and government supervision.

The Association Between Changes in Key Audit Matters and Earnings Management Behavior in Companies

Abstract Auditing Standards No. 58 “Communication on Critical Audit Issues in Auditing Report” in April 12, 2016. These new standards effect and regulate public listed companies to keep step with international auditing standards starting from Year 2016. The purpose of this study is to explore the relationship between the changes in key audit matters and earnings management, and to understand the relationship between the changes in key audits and the degree of corporate earnings management. The results of the study show that after controlling the endogenous nature of earnings management variables through the two-stage method of instrumental variables, the degree of earnings management is significantly negatively correlated with the change in the number of accounting items disclosed in the key audits of the auditor's audit report. That is to say, when the degree of management of earnings management is higher, the possibility that the number of items of key check items increases is lower, When the degree of management of earnings management is higher, the probability of the number of items for key check items is reduced. and the tendency is not to change the disclosure items of key check items. Keywords: Key audit matters, Endogeneity, Earnings management.

ESG Information Disclosure and Corporate Earnings Management——Research on the Moderating Effect Based on Media Attention

ESG information disclosure includes environmental conservation, social responsibility and corporate governance. It concerns the sustainable development of the company. The internal relationship between ESG disclosure level and earnings management and its action mechanism is an urgent problem to be solved. This paper takes A-share listed companies in Shanghai and Shenzhen from 2009 to 2021 as the research object to empirically study the correlation between ESG disclosure and corporate performance management. While introducing media attention as a moderating variable, we will empirically study the moderating effect of media attention on the relationship between ESG disclosure and enterprise performance management. The empirical results show that: (1) there is a negative correlation between the level of ESG disclosure and earnings management, that is, the higher the level of ESG disclosure, the lower the level of earnings management; (2) Media attention makes up for the gap caused by the lack of ESG information disclosure. In companies with low media exposure, ESG disclosure has a more significant deterrent effect on corporate performance management. The research in this paper reveals the governance effect of ESG information disclosure on corporate earnings management, verifies that ESG information has the effect of transmitting higher quality earnings information, and provides a reference for the research on ESG information disclosure in China.

Determinants Of Corporate Profit Management In Jakarta Islamic Index Mediated By Company Performance

Corporate earnings management is an essential issue in business entities. The fact reveals that users of financial statements are more focused on what is stated in the financial statements rather than how the profit process is obtained. This study analyzes and shows the factors influencing company earnings management in the Jakarta Islamic Index (JII) for the 2016-2020 period. Company performance is used as an intervening variable. This research uses a quantitative approach with secondary data in the form of panel data. The research population is all companies in the Jakarta Islamic Index (JII) for the 2016-2020 period, namely 30 companies. The sampling technique is purposive sampling, and 13 company samples were obtained. Data analysis technique using multiple linear regression and path analysis. The results showed that the independence of the audit committee, audit committee meetings, and company size positively and significantly affect earnings management. The audit committee size does not affect earnings management. Audit committee independence, audit committee size, and audit committee meeting do not affect company performance. Firm performance cannot mediate the effect of audit committee independence, size, and meetings on earnings management. This research can complement existing theory and be a reference for companies in improving performance and earnings management.

Credit market development and corporate earnings management: Evidence from banking and branching deregulations

We investigate how external credit market development affects corporate earnings management, by studying the impact of the U.S. interstate banking and branching deregulations on the intensity of accruals-based and real earnings management. We find that the banking and branching deregulations significantly decrease both accruals-based and real earnings-management intensity among firms in deregulated states. The effect is stronger for those deregulated states that have lower bank branch density before deregulation and states that have greater out-of-state bank entry after deregulation. The impact on corporate earnings management is channelled through increased banking competition and credit supply providing firms with easier access to external financing. The findings are robust to various endogeneity concerns. We further document that interstate banking and branching deregulations reduce the instances of financial results being subsequently affected by accounting restatements and improve firms’ information environment.

PENGARUH PROFITABILITAS, PERENCANAAN PAJAK DAN BEBAN PAJAK TERHADAP MANAJEMEN LABA (STUDI PADA PERUSAHAAN YANG TERDAFTAR DI JII TAHUN 2017-2021)

This study aims to determine the effect of profitability, tax planning and tax burden on corporate earnings management. Data processing in this study uses parametric statistics, especially regression analysis using eviews software. Using secondary data. This study uses company data registered on the Jakarta Islamic Index for the period 2017-2021. The research results obtained from 30 samples show that ROA has a positive and significant influence on management profits, while tax planning and tax burden do not have a significant effect on earnings management. So companies are advised to evaluate and improve their business strategies and improve their operational efficiency, such as reducing costs, increasing productivity, and increasing the use of assets. This can help increase ROA and reduce the pressure to perform earnings management.