Discretionary Earnings Management Research Articles

Sustainability reporting, board diversity, earnings management and financial statements readability: evidence from an emerging economy

PurposeThis paper aims to investigate the moderating effect of sustainability reporting on the relationship between the independent variables of board diversity, and earnings management and the dependent variable of readability of financial statements.Design/methodology/approachThe study panel data regression analysis involved 36 Kenyan-listed companies from 2016 to 2020.FindingsKey findings were that increased board diversity was found to significantly improve the readability of financial statements. Discretionary earnings management was found to significantly reduce the readability of financial statements. Sustainability reporting was found to significantly increase the readability of financial statements, and it moderated the relationship between board diversity, earnings management and financial statements readability in Kenya.Research limitations/implicationsThe study sample of 36 non-financial listed in the Nairobi Securities Exchange was very small and was affected by the problem of thin trading; hence, caution should be adopted when interpreting the findings.Practical implicationsThe Capital Markets Authorities (CMA) as a policymaker should enforce sustainability reporting by Kenyan listed firms as there is evidence that the reporting enhances the readability of financial statements. The Institute of Certified Public Accountants as a policymaker should closely monitor the published financial statements of firms for earnings management and punish the perpetrators, as there is empirical evidence that the practice reduces the readability of financial statements.Social implicationsSustainability reporting is successful as a moderating variable between readability of financial statements and determinants of readability of financial statements.Originality/valueThis study contributes to knowledge by studying sustainability reporting as a moderating variable between the independent variables of board diversity and earnings management and the dependent variable of readability of financial statements and measured sustainability reporting using a dummy variable for the period before and after the enactment and release of CMA code of 2016 on corporate governance that required sustainability reporting by Kenyan listed companies.

Does the UK Companies Act of 2006 matter for the private companies? Evidence from real and accruals earnings management practices

PurposeThe purpose of this study is to examine both accruals and real earnings management in a large sample of private companies in the UK using data from 2002 to 2009 following the implementation of the UK Act of 2006.Design/methodology/approachA panel data analysis using GMM has been adopted to examine the objectives of the study and answer the research questions.FindingsThe results of this study showed that the imposition of the Companies Act of 2006, on its own, did lead to changes in earnings management behaviour, in both accruals-based earnings and real earnings management. Moreover, this study also found that firms that chose to provide IFRS financial statements tended to show less discretionary earnings management, however, it tended to have no impact on real earnings management.Practical implicationsIn accordance with the research findings, standard setters with some insight tend to determine how capital markets see the information provided under the legislation such as the UK Act of 2006 in developed countries and thereby ensure long-term sustainability in a modern and sophisticated financial world. This study provides an insight into the successful implementation of the UK act of 2006, and its influence on the aspect of financial reporting.Originality/valueThe novel conclusion reached in the study is that there exists a strong and direct link between the smooth implementation of UK Act of 2006 and the practices of both accruals and real earnings management in real-world business and financial scenarios, particularly, in private companies.

Does discretionary earnings management more common among Indian companies around their IPOs?

ABSTRACT There is a relative absence of research that addresses the role of IPO grading on Earnings management (EM) in India. This study examines the earnings management practices among Indian companies that went for IPOs during the mandatory IPO grading era and the optional IPO grading era. The study covers 351 companies that went public for the first time in India from 2008 to 2022. The study found that the AEM practices proxied by discretionary accruals are decreasing during the grading era and increasing in the optional grading era. On the other hand, REM is found to be increasing in the grading era and decreasing in the optional era.

Pengaruh Kepemilikan Manajerial, Return on Assets, dan Leverage Terhadap Discretionary Earnings Management Pada Perusahaan Ipo di Bursa Efek Indonesia Periode 2018 – 2020

The purpose of ths study was analyze the influence of managerial proportion, return on assets, and leverage on discretionary earnings management in IPOs companies which listed in Indonesia Stock Exchange period 2018 until 2020. The purpose of this study is to examine and analyze the effect of managerial ownership, return on assets, and leverage on discretionary earnings management. IPOs are now widely adopted by the Company as a solution to obtain additional capital and also as a separate value that can improve the Company's image to investors. Achieving good profits is closely related to the Company's success in attracting more investors. Discretionary earning management activity as a solution for managers who have ownership proportions to manage the level of profit achievement by paying attention to the level of return on assets & leverage in the initial period when listing on the Indonesia Stock Exchange so that it can attract more investors for the success of the Company in managing its operations. The amount of managerial ownership in this study is measured by Managerial Proportion (MNJ), Return on Assets is measured by ROA, and Leverage is measured by Debt Equity Ratio (DER). This type of research is associative with a quantitative approach. The population used in this study were companies that conducted IPOs on the IDX in the period 2018 - 2020. The determination of the sample in this study used a purposive sampling technique with certain criteria, so as many as 13 companies were obtained. The data analysis technique used is multiple linear regression. The results of this study indicate that MNJ, ROA, and DER simultaneously or together have an effect on discretionary earnings management

Impact of Improved Corporate Governance and Regulations on Earnings Management Practices—Analysis of 7 Industries from the Indian National Stock Exchange

This study investigates discretionary earnings management practices, tracing the changes over the years in selected top performing and highly liquid listed Indian firms. It empirically measures the impact of corporate governance, financial legislation and global reporting standards on the firms’ earnings management practices. The study analyses a sample of 712 firm-year data comprising 89 listed Indian companies across 7 different sectoral indices of the National Stock Exchange of India (NSE) over 8 years (2011–2018). The Modified Jones model was used to compute Discretionary Accruals to measure Earnings Management based on data obtained using Bloomberg terminals. Statistical results and plots generated in Stata offer evidence that instances of earnings management have significantly reduced after the enactment of the Companies Act 2013 and the adoption of Indian Accounting standards which are converged with the IFRS. Findings suggest that services firms are engaging in relatively higher levels of earnings management compared to manufacturing firms. This study reveals the positive impact of improved corporate governance, regulation, and enforcement by significantly reducing the levels of earnings management among listed firms in India.

Pengaruh Rapat Dewan Komisaris, Latar Belakang Pendidikan Dewan Komisaris Terhadap Nilai Perusahaan

The application of the concept of corporate governance is an effort to restore the confidence of investors and institutions in the capital market. This research supports providing information about anything related to corporate governance in increasing firm value while consider the role of discretionary earnings management as a moderating variable in companies listed on the Indonesia Stock Exchange in 2015 - 2018. This analysis is also supported by several variables control variables there are company size and leverage. The results also show that discretionary earnings management is not able to moderate the relationship between the board of commissioners meeting and the educational background of the board of commissioners on the company's value.

Modeling the Relationship Between CEO Stock Ownership and at-IPO Discretionary Earnings Management

We develop the thesis that the relationship between CEO stock ownership and at-IPO discretionary earnings management is U-shaped, with too little stock ownership being as bad for reducing earnings management as is too much stock ownership. We also argue that ownership dispersion within the firm's board moderates the relationship. When firm ownership is evenly dispersed within director groups, the U-shaped relationship will become inverted-U due to board monitoring and reduced CEO power. Conversely, when ownership is not evenly dispersed, we expect that ownership concentration in the VC will especially strengthen the U-shaped association. Testing from a sample of 266 firms that completed an IPO provides support for the thesis and the associated hypotheses. Our theory and findings hold a host of novel implications for understanding the consequences of CEO as well as director stock ownership on managerial opportunism in various organizational settings.

Does managerial behavior of managing earnings mitigate the relationship between corporate governance and firm value? Evidence from an emerging market

The relationship between corporate governance and managerial choices for value creation is a topic of continuing interest for researchers. One of most significant managerial decisions that affect value is Discretionary Earnings Management (DEM) which is the judgmental adjustments in firm's reported accounting earnings by managers to upsurge firm value temporarily. Effective corporate governance structure to control this opportunistic behavior of mangers can presumably make accounting earnings more reliable and more informative for the stakeholders and hence, increase firm value. Based on 1944 firm year observations for listed firms in Pakistan, this study aims at to analyze the role of corporate governance in enhancing firm value along with the moderating role of DEM using models proposed by Kasznik (1999) and Beatty, Ke, & Petroni (2002) for detecting earnings management practices of managers. The results report that corporate governance significantly and positively influences firm value confirming the positive role of corporate governance in mitigating agency problem and enhancing the firm value. Moreover, corporate governance mechanisms may mitigate the managers’ opportunistic behavior of manipulating the reported earnings. Furthermore, the results report that the behavior of managers is opportunistic towards managing earnings and they are destroying the current and subsequent firm value by manipulating the reported accounting earning. Finally, this opportunistic behavior of managers to manipulate earnings is negatively moderating the well-established positive relationship of corporate governance and firm value.

Borrowing capacity and earnings management: An analysis of private loans in private firms

This empirical study investigates whether borrowers manage earnings to ameliorate their accounting portrait and to achieve a better borrowing capacity in the private loan market. We analyse the impact of borrowers’ earnings management activity on the amount and costs of their private loans both at the time of lending (ex post earnings management) and before a lending agreement is made (ex ante earnings management). We test our hypothesis on a panel sample of 465 small and medium-sized private corporations from the debt-dependent southern EU economies of Italy, Portugal and Spain over the 2002–2012 period. Using a generalized method of moments (GMM) model to control for endogeneity, we find that the discretionary earnings management activity of borrowers favours larger loan amounts, both ex post and ex ante. By contrast, we find no impact of borrowers’ earnings management activity on the costs of loans. Interestingly, we find that the relationship between earnings management and firms’ borrowing capacity is not significant before the enactment of the Basel II regulation; however, in the period following its enactment, we find a positive and systematic impact of earnings management (both ex post and ex ante) on the amount of bank loans, as well as some positive impact on the costs of bank loans. Our results indicate that borrowers manage earnings to signal better quality to lenders and to ameliorate their borrowing capacities, regardless of the excessive costs of doing so. In addition, we find that the introduction of the Basel II rules likely strengthened this tendency. The findings of this research should alert bank regulators to the feasibility of an unintended economic consequence of rigid discipline with respect to bank risk taking—namely, reducing borrowers’ transparency may lead to less prudent assessments of borrowers’ creditworthiness.

CEO Involvement in At-IPO Discretionary Earnings Management in Young Entrepreneurial Firms

Agency theorists attribute discretionary earnings management to the misaligned interests between CEOs (agent) and shareholders (principal). They suggest that CEOs have direct incentives to manipula...

The Influence of Discretionary Earnings Management and Tax Management on Book-Tax Differences

The Influence of Discretionary Earnings Management and Tax Management on Book-Tax Differences

Institutional investor type, earnings management and benchmark beaters

This paper classifies institutional investors into transient or long-term by their investment horizons to examine the association between institutional investor type and firms’ discretionary earnings management strategies in two mutually exclusive settings – firms that (do not) use accruals to meet/beat earnings targets. The results support the view that long-term institutional investors constrain accruals management among firms that manage earnings to meet/beat earnings benchmarks. This suggests long-term institutional investors can mitigate aggressive earnings management among these firms. Transient institutional ownership is not systematically associated with aggressive earnings management and is evident only among firms that manage earnings to meet/beat their earnings benchmarks. This indicates transient institution-associated managerial myopia may not be as prevalent as posited by critics. This study highlights the importance of explicitly considering the type of institutional investor and the specific setting when investigating the association between institutional ownership and corporate earnings management.