Degree Of Earnings Management Research Articles

Market power, industry concentration and earnings management: does corporate governance matter

PurposeThis study examines a link between firms' product market power, industry concentration, the degree of earnings management and the role of governance in curbing earnings management.Design/methodology/approachThe author uses different panel techniques of feasible generalized least squares (FGLS) and system generalized method of moments (GMM) to show robust study findings.FindingsThe study results reveal that firms lacking product market pricing power engage in earnings management, adding a new dimension to the existing literature. These findings mirror even at the industry level, where the authors document immense competitiveness led to earnings manipulation and stringent corporate governance mechanism has the potency to curb earnings management.Practical implicationsThe paper has valuable insights and practical implications for policymakers and market participants. The results indicate robust institutional oversight mechanisms can deter earnings management in a concentrated market.Originality/valueTo the best of the authors’ knowledge, this is among the first paper from India, a growing emerging economy, to look at the various aspects of market characteristics, earnings management and the role of corporate governance.

The Relevance of Audit Quality, Debt Financing and Earnings Management

The relevance of audit quality, DF, and EM is a topic of common concern at home and abroad. The research first analyzes the DF mode, EM motivation, and financial audit mechanism. Then the modified Jones model is applied to EM. Two regression models are constructed by introducing control variables and adjustment variables. According to the empirical results of 11835 observed sample values, there are differences in the degree of earnings management among A-share companies. The average accrued profit is 0.063, the maximum value is 3.960, the minimum value is 0, and the standard deviation is 0.091. The situation of different listed companies getting debt financing increments varies greatly, with an average value of 0.095 and a standard deviation of 0.214. The average asset-liability ratio is 0.429, and the average enterprise size is 22.215. Correlation analysis shows that there is a positive correlation between bank loan increment, total debt increment, commercial credit increment, and earnings management behavior, while there is a negative correlation between audit quality and earnings management. The regression analysis results show that there is a positive relationship between the total increase in corporate debt, the increase in commercial credit, the increase in bank loans, and the degree of earnings management, while there is a negative correlation between audit quality and the degree of earnings management.

Corporate Litigation Risk, Earnings Management and Audit Fees

As China’s economy and society continue to develop and the legal system progressively advances, litigation has become a way for more and more companies to resolve disputes. However, while litigation protects the rights and interests, it also brings different aspects of impact to the company itself, the audit firm and the stakeholders. This paper limits the sample to non-financial listed companies in Shanghai and Shenzhen A-shares from 2012-2019, and constructs an earnings management mediating effect model to study the impact of corporate litigation risk on audit fees and its mechanism of action. It is found that (1) company’s litigation risk has a significant positive effect on audit fees; (2) company’s litigation risk has a significant positive effect on the degree of earnings management; (3) the impact of corporate litigation risk on audit fees will be partly realized by increasing the company’s earnings management activities in the course of its operations, in other words, the higher the company’s litigation risk, the higher the company’s earnings management, which will further lead to an increase in audit fees.

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.

The Relationship between Enterprise Equity Incentive and Earnings Management in Big Data Era

With the development of China's securities market, earnings management of listed companies has attracted more and more attention from creditors, shareholders, securities regulatory authorities and other stakeholders. Equity incentive has two sides. If it can be effectively used, it will greatly mobilize the enthusiasm of management and bring about long-term incentive effect. Unlike mature western markets, China's securities market is an emerging market in a transitional economy. Because there is not a high correlation between the degree of earnings management and the compensation level of the management in China's listed companies, the motivation of the management to improve their compensation level is not significant for the purpose of self-interest. This paper analyzes the relationship between equity incentive and earnings management of Listed Companies in the era of big data, focusing on the relationship between equity incentive and earnings management.

Research on Financial Strategy and Financial Capability of Grassroots Power Supply Enterprises Based on Stochastic Matrix Model

On the basis of the generation, evolution, and development of the basic power supply enterprise’s financial core competence, this article determines the connotation and essence of the basic power supply enterprise’s financial core competence, so as to play a guiding role in fully and correctly grasping the basic power supply enterprise financial core competence. This article focuses on the formation mechanism and factors of the financial core competence of grassroots power supply enterprises and reviews the latest research hotspots and their theoretical significance in academia. By applying the random matrix model to evaluate the core financial capabilities of grassroots power supply enterprises, it proposes a path for cultivating and improving the core financial capabilities of grassroots power supply enterprises. Through a detailed and powerful discussion, it is possible to effectively improve the financial management efficiency of grassroots power supply enterprises and quickly adapt to the needs of market changes, so as to meet the interests of relevant stakeholders of grassroots power supply enterprises as much as possible. Considering the market competition environment, it is found that the positive relationship between corporate responsibility information disclosure and the degree of earnings management is only significant in low-competitive markets, which also shows that with the intensification of market competition, the degree of information asymmetry decreases. The ability of power supply is also increasing, which will weaken the mechanism of grassroots power supply enterprises to conceal earnings management behavior through corporate responsibility information disclosure. The results show that corporate responsibility information may become a tool to cover up the management of grassroots power supply enterprises to manipulate earnings and reduce the quality of earnings reports, and this behavior will be different in grassroots power supply enterprises with different characteristics and external environments. This will help to form an objective understanding of corporate responsibility information disclosure behaviors, identify the motives of grassroots power supply companies’ responsible behaviors for regulators, standardize corporate responsibility disclosure norms, and take differentiated measures for different situations.

Does sound lending infrastructure foster better financial reporting quality of SMEs?

Using an unbalanced panel dataset that contains financial information of 46,340 small and medium-sized enterprises (SMEs) across 11 European countries over 2007–2015, this study examines the impacts of soundness of institutional factors on SME financial reporting quality as (inversely) reflected by the degree of earnings management. We consider a comprehensive framework of country-level lending infrastructure proxies which includes information, legal, social and regulatory environments and show that SME financial reporting quality is better in economies where there is greater availability, depth and quality of credit information sharing between lenders and credit reporting service providers, as empirically shown by a lower level of earnings management. We also show that a well-established legal system, i.e. better judicial and bankruptcy protection systems, is effective in restraining SME earnings management incentives and, earnings management is less prevalent in economies that are subject to a higher stock of social capital which increases SME borrowing capacity. Furthermore, we find that the stringent tax and regulatory systems can foster better financial reporting quality, as earnings management may be less effective. Overall, our robust findings suggest that the soundness of country-level lending infrastructure plays a vital role in improving SME financial reporting quality.

Financing Constraints, Earnings Management and Corporate Tax Avoidance

Based on the data of all A-share listed companies from 2008 to 2019, this paper studies the relationship between financing constraints and the degree of tax avoidance and the influencing path of them. The results show that financing constraints can promote enterprises to avoid tax aggressively. The results of heterogeneity test show that the difference of property rights and enterprise scale will not affect the above results. Further research shows that a high degree of earnings management will enhance the promotion of financing constraints on tax avoidance.

Heterogeneity of Top Management Team and Earnings Management: An Empirical Analysis of A-Share Listed Companies during 2010-2017

The behavior of corporate earnings management is an important factor restricting the development of the industry. Based on the senior echelon theory, TMT’s demographic characteristics such as the cognitive basis, observation, values and other characteristics, affect their strategic decisions, and thus affect the company’s performance and development of the industry. This paper selected 3588 listed companies from 2010-2017 using the revised Jones model to measure the earnings management degree of listed companies, and analyzed the impact of senior management team members on enterprise earnings management in three dimensions of age, education level and professional background. The study found there is no obvious correlation between the age heterogeneity of TMT and the degree of earnings management; the heterogeneity of the education level and the heterogeneity of professional background have a significant negative correlation with the degree of earnings management. This study can improve the corporate governance structure, promote the reform of the market supervision mechanism, protect the rights and interests of investors, and then promote the healthy development of the industry.

Corporate Social Responsibility and Earnings Management of Listed Companies in Power Industry

Due to the particularity of business operation of electric power industry enterprises, their social responsibility will have an important impact on national economic development and residents’ life. In this paper, 303 Listed Companies in the power industry from 2013 to 2018 are taken as samples to measure the degree of social responsibility of the power industry based on the contribution of the power industry enterprises to the government, employees, shareholders, creditors, suppliers and customers, and to test the correlation between the Listed Companies in the power industry and earnings management. The empirical results show that the more the power industry enterprises pay to the outside world, the lower the degree of earnings management, that is, the better the degree of social responsibility of listed companies in the power industry, the lower the degree of earnings management. Through the research results of this paper, we can think that the social responsibility behavior of power industry enterprises is “altruistic” rather than “egoistic”, which explains the importance of non-marketization of large state-owned power enterprises such as State Grid Corporation of China.

Air Quality Uncertainty and Earnings Management

We empirically examine the influence of rising political costs from the air quality uncertainty caused by regional air quality fluctuations on firms′ earnings management. The results indicate that when air quality uncertainty increases, firms tend to increase their degree of earnings management and are more willing to carry out downward earnings management. We also find that the relationship is more obvious in the bottom-ten cities according to air quality ranking. Further evidence shows that the effect is most pronounced for less market-oriented regions, northern regions, manufacturing industries and firms with high asset-liability ratio and high media attention. In addition, we find that air quality uncertainty affects earnings management through the intermediary effect of government environmental investment. We explore the influence of the external environmental uncertainty on earnings management decisions, and the results have significant reference value for improving firms’ earnings quality level.

Liquidity, earnings management, and stock expected returns

This paper examines the relationships among liquidity, earnings management, and stock expected returns by using a sample of Chinese listed firms to investigate 22,022 firm–year observations from 1998 to 2018. Our study reveals that an increase in stock liquidity is associated with a decrease in the degree of earnings management. This result is robust to the use of alternative measures when endogeneity concerns are controlled for. Moreover, the findings indicate that the stock liquidity component of earnings management is positively associated with future stock returns in Chinese firms. Our results reveal that the stock liquidity component of short-termism in managerial decisions plays a critical role in determining future stock returns.

Earnings Management in IPOs: Moral Hazard or Signalling?

This paper sheds light on the long-standing debate between the opportunistic and information perspectives of earnings management based on a controlled laboratory experiment. We find that low-earnings firms manage earnings more than high-earnings firms, which favors the moral hazard explanation over the one based on the signaling motive. When we introduce a limit on the degree of earnings management (i.e., as a proxy for regulatory power, such as accounting standards, litigation regulations, and reversals in earnings management), earnings management acts more similar to a signaling device. In the treatments with limit, the reported earnings become a more informative indicator of actual earnings, as low-earnings firms reduce earnings inflation, while high-earnings firms increase upward earnings manipulation. Consequently, market pricing efficiency improves, leading to better investor protection. Our findings highlight the importance of accounting regulation as a tool for enhancing the market quality and protecting investor interest.

Board characteristics and earnings management in Sri Lanka

Purpose The purpose of this paper is to examine the association between designated corporate governance attributes and the degree of earnings management in selected quoted companies in Sri Lanka. Design/methodology/approach In total, 70 listed companies in Colombo Stock Exchange (CSE) were selected based on the highest market capitalisation for the period covering from 2015 to 2017 and representing beverage, food and tobacco, diversified, hotel and travel, manufacturing, oil palms and health care sectors, which accounted for 59.9 per cent of the total market capitalisation of CSE. Findings This study found a positive relationship between CEO-Chair duality and earnings management. Practical implications The insights may also provide investors, economic analysts and regulators with early caution indicators of potential problems in a corporation regarding corporate governance failures and aid stakeholders in assessing the effectiveness and efficiency of the board and corporate governance structure and earnings management methods. Originality/value This study extends the extant research on board characteristics and real earnings management by adopting prominent research design and modernised data. This study offers evidence on how selected audit and board committee’s characteristics influence real earnings management practices.

Country factors in earnings management of ADR firms

This study examines the impact of investor protection, market monitoring, and stock liquidity on the degree of earnings management using a sample of 430 firms from 34 countries cross-listed as American Depository Receipts (ADRs). Our primary findings are that ADR firms from countries with strong legal system, strong outside investor rights, more institutional shareholders, and more financial analysts following are less likely to engage in earnings management. Auditor quality is not a significant factor. Further, firms with low stock liquidity tend to manipulate earnings relative to those with high liquidity. Legal factors, institutional holdings, and stock liquidity are particularly significant factors, suggesting that threats of lawsuits and monitoring by investors are effective mechanism to reduce earnings manipulation. Results also indicate that cross-listed firms exercise more earnings management in the pre-listing period than in the post-listing period and that stocks listed in the OTC market tend to have more earnings management than those in major exchanges.

Does the board of directors as Fat Cats exert more earnings management? Evidence from Benford’s law

The co-existence of an unbridled self-interested board of directors with weak corporate governance provides firms with a strong incentive to exert more earnings management. Since directors form the core of corporate governance, once they act as Fat Cats (board members who are both in charge of a company and have the power to increase their own pay substantially) to connive in earnings management, this in turn will incur substantial damage to the quality of the firm’s financial information. First, thus, this study investigates whether these directors guide executives to perform more earnings manipulation. Next, to examine the impact of regulatory reforms in Taiwan on Fat Cat firms’ earnings management, we probe whether these firms exert less earnings management after they were denoted as being Fat Cats. This study employs Benford’s law to overcome the shortcomings of accrual models’ insufficient explanatory power on the detection of earnings management, because Benford’s law uses the first or the second digit of holistic data to identify if the distribution of whole numbers deviates from the theoretical distribution. The test results present solid evidence that Fat Cat firms do exert more earnings manipulation than non-Fat Cat firms do, and further find that these firms still perform a certain degree of earnings management after they were announced as being Fat Cats. The results suggest that legislative authorities and investors may re-examine whether the competent authorities have created a suitable environment to enhance the quality of listed firms’ financial statements.

Marital Status and Earnings Management (A Note)

In this note, we examine the effect of CEO marital status on the riskiness of financial reporting. Using multiple proxies, we find that firms headed by a single CEO display a higher degree of earnings management than those headed by a married CEO. The effect is economically significant. Our results persist in an instrumental variable regression, suggesting that our results are not driven by innate heterogeneity in preferences.

Impact Of Adopting IAS-IFRS On The Handling Of Accounting Data: The Case Of France

<p>In this article we look at the possible relation between the IAS-IFRS, which promotes a present value, and earnings management enhanced by the application of these standards. The aim of this paper is to analyse the impact of the adoption of IAS-IFRS standards on the earnings manipulation used by managers to manipulate their earnings and other accounting information in order to keep the same image in front of investors and shareholders.</p> <p>We are expanding, to the French context, the problem of information content of the discretionary component of accounting income in connection with the application of IAS-IFRS since 2005.</p> <p>On the basis of a sample of 96 firms-year observations, selected from France, that adopted the IAS-IFRS since 2005, we studied the relationship of association between accounting variables the impact of the use of IAS-IFRS on discretionary accruals. In other words, we tried to analyse the advantages and disadvantages of the adoption of IAS-IFRS.</p> <p>The study results show that the manipulation of accounting information existed both before and after the adoption of IAS-IFRS. However, the application of IAS-IFRS accounting standards in France had less motivated managers to manipulate the accounting numbers to increase earnings. Infact, the degree of earnings management is higher before the adoption of IAS-IFRS (the manipulations were 22.06% of discretionary accruals after adoption of IAS-IFRS and 31.28% before).</p>

Short-Term and Long-Term Effects of IFRS Adoption on Disclosure Quality and Earnings Management

This study investigates the effect of IFRS adoption on the transparency of financial reporting in Germany. Using a sample of listed companies ranging from 1995 to 2012, we separately analyze the effect of IFRS adoption on disclosure quality and the degree of earnings management. We use disclosure quality scores of an annual report ‘beauty contest’ published by the German business journal manager magazin to proxy for disclosure quality and discretionary accruals from the Kothari et al. (2005) model to proxy for the degree of earnings management. We hypothesize and find that IFRS adoption is associated with an increase in disclosure quality and with an increase in the extent of earnings management. Although these results seem confounding in the light of the assumed superiority of IFRS over German GAAP, we argue that low compliance, lack of experience and weak enforcement in the early years of IFRS adoption drive the latter result. Based on this notion, we show that the degree of earnings management decreases significantly from the early to the mature phase of IFRS reporting. Finally, we show that disclosures have the potential to constrain earnings management.

Comparison of cosmetic earnings management for the developed markets and emerging markets: Some empirical evidence from the United States and Taiwan

This study examines the effect of the implementation of corporate governance regulations on cosmetic earnings management in developed and emerging markets respectively. Using Benford's Law, the analysis employs 84,870 positive earnings observations for all publicly listed US and Taiwan companies from 1990 to 2011.The empirical results show that, regardless of developed markets and emerging markets, the phenomenon of cosmetic earnings management exists. In contrast to developed markets, corporate managers of emerging markets have stronger incentives to manipulate earnings. More importantly, it was found that the degree of earnings management is significantly less after implementing corporate governance regulations both in developed and emerging markets. This result suggests that the implementation of corporate governance regulations plays an important role in reducing the earnings manipulative behavior. The findings of the study add more evidence to the ongoing debate about the effectiveness of corporate governance regulations in preventing earnings management.