Differences In Earnings Management Research Articles

Perbedaan Earnings Management pada Pergantian Chief Executive Officer pada Perusahaan Manufaktur yang Terdaftar di BEI

One of the information contained in the financial statements is information about the company's earnings. Profit information as part of the financial statements is often the target of engineering through opportunistic management actions to maximize its satisfaction. Behavior management to manage earnings as they wish is known as earnings management. Factors affecting earnings management practice is the change of chief executive officer. This study aims to obtain empirical evidence of differences in earnings management at the turn of chief executive officer. This research was conducted at the manufacturing company which registered in Indonesia Stock Exchange Year 2012-2016. The method of determining the sample used is to use purposive sampling. The number of companies that meet the criteria is 34 companies observed. Data analysis technique used is different test Independent Sample t-test. Based on the results of the research, it is known that the CEO of the long period of his tenure proved earnings management that tends to increase profit (income increasing), and also the new CEO of the initial period of his tenure proved to earn earnings management that tends to decrease income (income decreasing).
 Keywords: Earnings Management, Chief Executive Officer

Analisis perbandingan manajemen laba dengan metode Discretionary Accrual pada bank syariah dan bank konvensional

Earnings management is a deliberate act by managers using their power to determine the policy of regulating the level of corporate earnings. The purpose of this study is to prove that there is a difference between the level of earnings management in Islamic banks and conventional banks. The sample of this research are Islamic banks and conventional banks registered in Bank Indonesia for 2011-2015 The sample used is 96 samples. The testing technique in this study used independent mean test (Independent Sample T-Test). The earning management variables in this study were measured by discretionary accrual, measurement using Modified Jones Model (1991) to calculate total accruals. The results showed that the value of Sig. (2-tailed) is 0,000 indicates that there is a difference between Group A and Group B. It means that there is a difference between discretionary accrual ratio of conventional bank and discretionary accrual ratio of Islamic banks, it can be said there are differences in earnings management between Conventional Bank and Islamic Bank.

Earnings management behaviour of Shariah-compliant firms and non-Shariah-compliant firms

Purpose – This paper aims to answer the following questions by using the data from the MENA region (Morocco, Egypt, Saudi Arabia, United Arab Emirates, Jordan, Kuwait and Bahrain): Do Shariah-compliant firms differ from other firms in the quality of information disclosure? and Can investors consider information disclosed by Shariah-compliant firms more truthful than information disclosed by other firms? Design/methodology/approach – Using regression analysis, this paper examines the relationship between earnings management and Shariah compliance during the period between 2005 and 2009. Findings – Results show that Shariah-compliant firms engage in lower earnings management than non-Shariah-compliant firms. This paper argues that financial characteristics of Shariah-compliant firms (i.e. low leverage, low account receivables and low cash) provide lower chances to managers to misreport earnings. It is also shown that external conditions can minimize the difference in earnings management between the two groups. Results show no significant difference between earnings management of Shariah-compliant firms and earnings management of non-Shariah-compliant firms in the common law countries and during the crisis period. This paper considers high risk of litigation in common law countries and enhanced monitoring of stock market participants during the crisis period main factors behind these results. This paper argues that external governance mechanisms can result in improving disclosure practices of non-Shariah-compliant firms to a level that minimizes the impact of Shariah compliance on earnings management. Practical implications – Results have implications for investors and regulators functioning in the MENA region. These results indicate that non-Shariah-compliant firms, being more prone to earnings misreporting, need more scrutiny from regulators than Shariah-compliant firms. Originality/value – The authors believe that this paper is the first attempt to argue that it is the financial characteristics of Shariah-compliant firms (i.e. low leverage, low account receivables and low cash) that result in better disclosure of reported earnings.

Differences in earnings management between audited and non-audited private manufacturing firms: evidence from Greece

Using the level of discretionary accruals as a proxy of earnings management, we provide empirical results related to the extent of earnings management among a sample of audited and non–audited non–listed manufacturing Greek firms. In accordance with our expectations of the importance and the effect of external auditing on financial reporting, we observe that private firms that are obliged to provide non–audited financial statements report higher (lower) levels of discretionary accruals during upward (downward) earnings management compared to audited private firms. Moreover, we provide evidence consistent with the argument that some non–audited firms that are close to satisfying the criteria of statutory audit manage earnings in a direction that helps them miss the accounting related criteria. However, we fail to detect that external auditing confines the use of abnormal accruals in cases of debt issue. This result also contradicts our expectation that the low level of financial transparency that is driven by the non–publication of interim financial statements will demotivate private firms to manage earnings when raising debt capital.

Differences in earnings management between firms using US GAAP and IAS/IFRS

Purpose – The purpose of this paper is to examine whether the relatively rules-based US Generally Accepted Accounting Principles (GAAP) and the more principles-based International Accounting Standards/International Financial Reporting Standards (IAS/IFRS) provide different opportunities for earnings management (EM). Such an examination is critical as the world moves toward principles-based standards. Design/methodology/approach – Financial information for the fiscal years 1999-2004 from the annual reports of firms listed under the Prime Standard on the Germany Frankfurt Stock Exchange is analyzed. Data from the German Frankfurt Stock Exchange are used to resolve the difficulty in comparing accounting standards across different markets and countries with different institutional factors and corporate governance issues. The unique feature of dual listing in the German Frankfurt Stock Exchange allows firms listing shares under the Prime Standard to report in accordance with either the US GAAP or the IAS/IFRS before the IFRS adoption by the European Union in 2005. Strong legal enforcement in Germany ensures that reporting under each standard is in close compliance to the standard under comparison. Extending extant IFRS vs US GAAP EM research with discretionary accruals, this research contributes to a more comprehensive understanding by also examining EM through deferred tax expense and EM through research and development investment. Findings – The findings reveal that EM through research and development investment is significantly higher for the IAS/IFRS firms. Similar to prior findings, EM through accruals is not found to be significantly different between US GAAP and IAS/IFRS firms. Originality/value – The findings of this study advance the understanding of differences between US GAAP and IFRS with data from Germany where legal enforcement of standards is strong. In particular, this study reveals that principles-based standards with imprecise rules like IAS/IFRS may encourage structured management due to the expectation of error costs and compliance uncertainty. The results inform regulators considering IAS/IFRS adoption. In addition, this research highlights the importance of considering real EM in US GAAP vs IAS/IFRS studies.

Governance and Earnings Management in Emerging Markets - An Institutionalized Agency Perspective

This paper examines why firm decision makers vary in their earnings management behavior in emerging markets. Previous research on the antecedents of earnings management are single country studies focusing on firm level governance mechanisms. This paper builds on this prior work and incorporates firm ownership predictors to explore differences in earnings management in a sample of 1200 firms in 24 emerging markets in 2012. In addition we theorize and demonstrate empirically that firm level mechanisms do not function in isolation, but are reinforced or attenuated by elements of the external governance environment, such as minority shareholder protection and regulatory quality. Our empirical analysis indicates that controlling ownership is positively related to earnings management. We also find that while minority shareholder protection weakens the positive relationship between controlling ownership and earnings management, regulatory quality strengthens the negative relationship between institutional owners...

Cultural Relativism in Earnings Management

The purpose of this study is to examine the possible impact of value systems on earnings management in France, Tunisia and Canada. Cultural values include power distance, uncertainty avoidance, individualism, masculinity and long-term orientation. The cross-cultural study uses the method of structural equations trough LISREL approach. The examination covers the period between 2003 and 2009. Findings show first of all, that ecological factors are able to determine cultural dimensions in the sample countries. Secondly, we found that all studied cultural dimensions are able to define national culture in the sample countries. Yet, results indicate that only three of cultural dimensions are significant in explaining differences in earnings management in the studied context. In fact earnings management seems to be positively related to uncertainty avoidance and negatively related to power distance and individualism.

Earnings management and the stock market response to the Sarbanes‐Oxley Act based on a measure of competitive strategy

PurposeConventional wisdom implies that firms manage earnings to maximize the wealth of the manager, the value of the firm and/or the amount of information in the market. The purpose of this paper is to offer an additional explanation.Design/methodology/approachUsing companies from the Standard & Poor's 500 index and an annual report disclosure ranking, the authors employ a standard t‐test of means across groups to check for differences in disclosure based on a competitive strategy measure (CSM). The CSM classifies industry rivals into strategic complements or substitutes. The authors also test for differences in earnings management using discretionary accruals and using event study methodology examine how stock returns respond to the Sarbanes‐Oxley Act.FindingsThe authors show that earnings management is a tool used by firms based on the level of competitive strategy within the industry. It was found that firms competing as strategic substitutes are more likely to actively engage in earnings management through discretionary accruals when the informational environment permits. It was also found that substitute firms suffer greater negative wealth effects than complement firms in response to the Sarbanes‐Oxley Act.Originality/valueThis is one of the first empirical articles to examine how competitive strategy affects earnings management and the stock market response to the Sarbanes‐Oxley Act of 2002.

Corporate diversification and earnings management

PurposeThe purpose of this paper is to find out whether corporate diversification provides a favourable environment for earnings management (agency conflicts hypothesis) or whether it mitigates this phenomenon (earnings volatility hypothesis).Design/methodology/approachBased on a sample of US firms and making an explicit distinction between industrial and geographic diversification, univariate and multivariate analyses are used to test whether firm diversification has an impact on earnings management.FindingsResults show that the average diversified firm in the sample has somewhat more earnings management problems than a similarly constructed portfolio of stand‐alone firms chosen to approximate the segments of the conglomerate. Consistent with the agency conflicts hypothesis, the authors find that geographic diversification increases earnings management whereas industrial diversification decreases it, consistent with earnings volatility hypothesis. Moreover, industrial and geographic diversification combined reinforce this phenomenon. These findings are consistent with the view that the costs of geographic diversification outweigh the benefits.Originality/valueThe paper makes an important contribution to the accounting literature by providing new and significantly different evidence on the relative roles of corporate diversification in the earnings management. By linking two streams of research, earnings management and corporate diversification, one is taken into the unexplored area of the sources of the difference in earnings management between diversified and focussed firms. More specifically, this study provides evidence that earnings management is more intensively practiced in geographically diversified firms and even more so in firms that are both industrially and geographically diversified.

The issuance of convertible bonds and earnings management: evidence from Taiwan

PurposeThe purpose of this paper is to examine whether companies engage in earnings management during the specific years when convertible bonds are issued and redeemed; also to determine if any differences exist in earnings management when convertible bonds are issued domestically or abroad.Design/methodology/approachDiscretionary current accruals are adopted as proxies for earnings management and the regression models are used to control the related variables.FindingsThe empirical results indicate that companies conduct earnings management in the years when convertible bonds are issued, and that there is no significant difference between earnings management when convertible bonds are issued in Taiwan or abroad. However, data after 2001 indicate that companies issuing convertible bonds abroad perform less earnings management compared to those issuing convertible bonds domestically. The results show no significant difference in earnings management in the years when convertible bonds are redeemed; the reasons may be due to the relatively small sample size and that the majority of convertible bonds are still outstanding.Originality/valueThis paper advances findings from previous studies, that firms conducting seasoned equity offerings manage earnings upward to increase the offering proceeds. This paper highlights the linkage between convertible bonds and earnings management. Conducting an integrated analysis of the relationship between convertible bonds and earnings management, it aims to provide a better understanding of the process.

A Multivariate Study on Earnings Management

This study extends the work of Leuz et al. (2003) through using multivariate statistical analyses. I examine the differences in earnings management based on the notion of investor protection across 26 countries. Consistent with the prediction that earnings management is expected to be lower in countries with strong investor protection, the findings show that significant differences in investor protection reflected by country-level institutional characteristics exist among legal origin and legal tradition groups, and the differences in earnings management across countries are significantly associated with the differences in these institutions.

Influence of Culture on Earnings Management: A Note

This article examines the influence of national culture on earnings management across a broad cross‐section of countries. In addition to examining the relation between culture and earnings management in general, two different types of earnings management are examined, namely, earnings smoothing and earnings discretion. Regression results indicate that, as expected, the cultural dimensions of uncertainty avoidance and individualism are significantly related to earnings management, even after controlling for investor protection and other legal institutional factors. Culture has a stronger relation with earnings smoothing than with earnings discretion, and cultural dimensions explain a greater percentage of the variation in aggregate earnings management and earnings smoothing than do investor protection variables. These findings suggest that there is a significant link between culture and cross‐national differences in earnings management, especially in the form of earnings smoothing.

Corporate governance and earnings management in the Chinese listed companies: A tunneling perspective

This paper examines the relation between earnings management and corporate governance in China by introducing a tunneling perspective. We document systematic differences in earnings management across the universe of China's listed companies during 1999–2005, and empirically demonstrate that firms with higher corporate governance levels have lower levels of earnings management. We study two China-specific situations, in which the listed firms have strong incentives to manage earnings in order to meet certain return on equity (ROE) thresholds, and earnings management has been shown to be the most conspicuous. We identify tunneling evidence for each. Our empirical findings, although not being able to completely exclude other explanations, strongly suggest that agency conflicts between controlling shareholders and minority investors account for a significant portion of earnings management in China's listed firms.

Cross Listing, Bonding and Firms' Reporting Incentives: A Discussion of Lang, Raedy and Wilson (JAE 2006)

Lang, Raedy and Wilson (2006) examine the properties of U.S. GAAP accounting numbers provided by cross-listed firms and compare them to those of U.S. firms. Using a wide range of properties related to earnings management, timely loss recognition, and value relevance, LRW show that accounting data are not comparable across cross listed and U.S. firms, despite the fact that all firms use the same accounting standards. In this paper, I discuss how these findings advance the literature and what they imply for the effectiveness of cross listing as a bonding mechanism. My discussion highlights that the documented reporting differences cannot be solely attributed to weak U.S. legal and SEC enforcement. I emphasize that accounting standards provide discretion and that cross-listed firms are likely to have different incentives than U.S. firms to use this discretion. To illustrate, I document that cross listed and U.S. firms differ with respect to their ownership concentration and that these differences are associated with differences in earnings management. Consistent with the authors' findings, I also provide evidence that home-country institutions continue to influence cross-listed firms' reporting behavior.

CAP Forum on Enron: Former Audit Firm Personnel as CFOs: Effect on Earnings Management*

ABSTRACTCorporate hiring of former audit personnel to fill key financial positions is a practice that has attracted attention from the media, the accounting profession, and regulators. The concern is that the former external auditor who now holds a key position with the client may be able to circumvent the audit or exert pressure on the audit team and adversely influence audit quality.We compare a sample of 172 test companies that appointed to the position of chief financial officer (CFO) personnel who are former employees of the companies' auditors, with a control sample of companies that appointed new CFOs who were not affiliated with their auditors. We investigate whether the level of discretionary accruals is greater for the test sample compared with the control sample during the two years following appointment of the CFO. Both univariate and multivariate results for signed discretionary accruals suggest some support for the hypothesis that firms with affiliated CFOs are associated with greater earnings management than firms with unaffiliated CFOs. Furthermore, the results for signed discretionary accruals suggest that the association is stronger for nonpartners who moved from the audit firm to the client with little or no time gap. On average, the results for absolute discretionary accruals do not suggest differences in earnings management between affiliated and unaffiliated CFOs. However, they do indicate some earnings management relative to unaffiliated CFOs by CFOs who had little or no time gap between leaving the audit firm and joining the client firm, although at a weaker level of significance.

Earnings Management to Tunnel: Evidence from China's Listed Companies

This paper hypothesizes that earnings management in China's listed companies is mainly induced by controlling owners' tunneling activity. We conduct our analyses in two stages. In the first stage, we relate our analyses to prior research on Chinese listed companies which has documented their strong incentives to manage earnings in order to meet certain return on equity (ROE) thresholds. We identify tunneling evidence in two scenarios where such practice has been most conspicuous. In the second stage, we examine systematic differences in earnings management across the universe of China's listed companies during 1999-2001. We provide cross-sectional and time-series evidence showing that firms with higher corporate governance levels tend to have less earnings management. Our empirical findings although not being able to completely exclude other theories, strongly suggest that agency conflicts between controlling shareholders and outside investors are the main stimuli of earnings management in China's listed companies.

Does CEO/CFO Certification of Financial Statements Constrain Earnings Management in Financial Reporting? Evidence from Canadian Companies *

We examine whether firms engage in less income-increasing earnings management following the Sarbanes-Oxley Act and the resulting requirement by the SEC that financial statements be certified by firms' CEOs and CFOs. Unlike other research on this topic that examines US firms, we focus on Canadian firms that are listed on both Canadian and US exchanges. Because these firms are listed on US exchanges, their CEO/CFOs have to certify their financial statements in accordance with the SEC's rule. We find that earnings management in the certification year is significantly lower than in the pre-certification year for these dual-listed firms. We perform a similar comparison for a sample of Canadian firms that are listed only on Canadian exchanges. These firms are not subject to the SEC's certification requirement; therefore, their incentives to manage earnings upwards have not changed from the pre-certification to the certification year. Consequently, they serve as a natural control sample for our tests. Our empirical evidence is consistent with this prediction. We find no significant difference in earnings management in the certification and pre-certification years for these firms. Our findings suggest that the Sarbanes-Oxley Act and the resulting SEC requirement that CEO/CFOs certify their financial statements enhanced the quality of reported earnings by reducing the extent of income-increasing earnings management.

Earnings management and investor protection: an international comparison

This paper examines systematic differences in earnings management across 31 countries. We propose an explanation for these differences based on the notion that insiders, in an attempt to protect their private control benefits, use earnings management to conceal firm performance from outsiders. Thus, earnings management is expected to decrease in investor protection because strong protection limits insiders’ ability to acquire private control benefits, which reduces their incentives to mask firm performance. Our findings are consistent with this prediction and suggest an endogenous link between corporate governance and the quality of reported earnings.

Investor Protection and Earnings Management: An International Comparison

This paper examines the pervasiveness of earnings management across 31 countries between 1990 and 1999. It documents systematic differences in earnings management across different clusters of countries. We propose an explanation for these differences based on the notion that insiders, in an attempt to protect their private control benefits, use earnings management to conceal firm performance from outsiders. Thus, earnings management is expected to decrease in investor protection because strong protection limits insiders' ability to acquire private control benefits, which reduces their incentives to mask firm performance. Our evidence is consistent with this prediction. The findings suggest a link between corporate governance and the quality of reported earnings, and complement prior finance research that treats the quality of corporate reporting as exogenous.