Earnings Management Activities Research Articles

Can Accounting Standards Mitigate Real Earnings Management Activities? The Case of Inventory Costs

Prior literature suggests that managers engage in inventory overproduction to inflate current earnings but this form of real earnings management can result in significant economic costs (Bruggen et al. 2011). Additionally, Statement of Financial Accounting Standards (SFAS) No. 151 may inadvertently encourage overproduction by requiring that companies expense unallocated overhead in the current period (Young et al. 2014). In this study, we investigate whether, in recent years, managers’ overproduction decisions change, by examining whether abnormal production costs of suspect U.S. GAAP firms differ before versus after the adoption of SFAS 151. We also compare the behavior of suspect U.S. GAAP firms to that of suspect IFRS firms because the treatment of inventory costs under IFRS has always been similar to the treatment under SFAS 151. Thus, IFRS firms serve as a control group in our setting. We find that prior to the adoption of SFAS 151, suspect U.S. GAAP firms used overproduction to meet benchmarks, but we do not observe overproduction to meet benchmarks after the adoption of SFAS 151. In addition, we find that suspect IFRS firms do not engage in overproduction to meet benchmarks either before or after SFAS 151. Using a difference-in-differences design, we find that suspect U.S. GAAP firms reduce overproduction relative to suspect IFRS firms following the adoption of SFAS 151. Finally, in a supplementary test, we find that the quality of working capital accruals improves under SFAS 151, in that working capital accruals better reflect past, contemporaneous, and future cash flows. Overall, our results suggest that, in recent years, managers of U.S. firms have generally avoided overproduction, presumably because of the economic costs associated with this practice and/or because of increased monitoring and skepticism of management decisions following corporate failures that led to the enactment of the Sarbanes-Oxley Act of 2002.

Earnings manipulations and board's diversity: The moderating role of audit

This paper analyzes whether an audit index moderates the relationship between boardroom composition (gender diversity and foreign directors) and earnings-management activities in the European context. Data from a sample of 429 European firms listed on Stoxx Europe 600 Index from 1998 to 2017 are used to test a moderation model. Evidence reveals that board gender diversity is negatively associated with both accruals-based and real earnings management activities, while non-European directors are positively associated with the earnings-management activities. Further, audit index significantly moderates the link between board diversity and earnings-management. This study is unique in providing European evidence for the moderating effect of audit quality on the link between the demographic features of board members and the firm outcome. This paper is also relevant as it develops a composite index of audit quality.

An Investigation of Audit Committee Characteristics on Audit Quality towards the Changes on Real Earnings Management: Evidence from Jordan

Although, the characteristics of an audit committee were always considered as a protective tool for the stakeholder's interest in the capital market yet the manipulation of the Real Earnings Management activities also created a major threat among the stakeholders whenever the audit committee was engaged with the top management of the business organizations. This paper is aimed to reveal the mediating effect of audit quality on the relationship between the characteristics of an audit committee and real earnings management. To this, the previous literature related to the characteristics of an audit committee regarding audit committee, audit quality, and real earnings management was reviewed and found that studies on the characteristics of an audit committee, audit quality, and real earnings management presented miscellaneous results. Consequently, the previous studies permit further research to find the mediating effect.

Short Selling Pressure, Reporting Transparency, and the Use of Real and Accruals Earnings Management to Meet Benchmarks

Prior literature finds that short selling is beneficial to the market because it increases liquidity and helps to discipline optimistic market prices. The authors use 2 controlled experiments to examine the potential for an unintended consequence of allowing short selling or easing short selling restrictions. Because prior research identifies short sellers as sophisticated market participants who have the ability to see through accrual earnings management choices, we predict and find that, when reporting is transparent, managers are more likely to use real earnings management relative to accrual earnings management when short selling restrictions are relaxed. This is consistent with the idea that real earnings management activities are more defensible as the result of legitimate operating decisions and are therefore more likely to hold up to scrutiny from short sellers. Overall, the results suggest that regulations that are unrelated to financial reporting can affect how managers respond to the transparency that arises from financial reporting regulations.

Relationship between Leverage and Firm Size Toward to Real Earning Management (Unit Analysis of Mining Company Indonesia Exchange Stock Period 2012 Until 2015)

This study found new results from the development of previous research. Previous research, earnings management is measured through discreationary accruals by disbursing total accruals with non-discreationary accruals using the Jones Modified model (Dechow et al., 1995) with the formula TA = Nit – CFOit. Previous research and this study were conducted on mining companies listed on the Indonesian stock exchange in the period 2012 to 2015. The results of previous studies that leverage had no effect on earnings management and earnings management is an intervening variable that has a significant influence on earnings quality. (Irene Barus et al., 2018). This study aims to analyze the relationship between leverage ratio and firm size to real earnings management using discretionary accruals through real daily earnings management activities. Managers tend to choose earnings management through real activity manipulation rather than earnings management through accruals (Graham et al. 2005; Roychowdhury (2006: 338). The results of this study indicate leverage variables have a positive and significant effect on real earnings management activities.

Firm borrowing capacity, government ownership and real earnings management

Purpose The purpose of this paper is to examine borrowing capacity (BC) of government-owned firms and whether real earnings management (REM) activities moderate the sensitivity of firm BC to government ownership. Design/methodology/approach A simultaneous equation analysis is applied to study 210 Tunisian non-financial firms over the 2001–2014 period. Findings The empirical results provide substantial evidence indicating that government-owned firms have higher BC and significant REM than other firms; the relationship between government ownership and firm BC is partially moderated by REM activities. Practical implications The findings imply that the implicit credit guarantee of government is not necessarily the unique determinant of firm BC and highlight the role of lenders in monitoring discretionary real transactions in government-owned and protected firms. These implications should be taken in to account by public sector policy makers. In particular, the findings predict that the current government accounting reform in Tunisia on the basis of IPSAS will, probably, improve information quality, but it is still insufficient to control real activities in public institutions. Originality/value This study extends a growing research stream on the relationship between BC and government ownership by focusing on the moderating effect of REM on this relationship and by considering the endogeneity issue. The findings provide evidence that government-owned firms use REM practices to improve their BC. Examining these practices in developing countries provides an opportunity to evaluate the efficiency of their public sector reforms and their effect on a firm’s performance and financing decisions.

Industry competition, earnings management and leader–follower effects

ABSTRACTThis article examines the impacts of industry competition on the leader-follower effects in different earnings management activities. The empirical results show that there are the leader-follower effects in the accrual-based earnings management in industries with different extents of competition, while there is the leader-follower effect in the real earnings management activities in industries with lower degrees of industry competition. The evidence implies that the industry competition affects the leader-follower effects in the different earnings management activities, and then the different extents of industry competition have different mediation effects on the leader-follower effect. We expect the empirical results not only fill the gap of literatures, but also provide a new insight for the investors and regulators in their investment decision and regulation revision.

Big-Four Auditors and Financial Reporting Quality: Evidence from Pakistan

Purpose of Study: The purpose of this paper is to investigate whether firms audited by big four auditors have better financial reporting quality as compared to firms audited by non-big four auditors in Pakistan.
 Methodology: This study examine whether firms are more engaged in real earnings’ management when their ability to manage accruals is constrained by big four auditors. In current study, we find that big four auditors’ have curtailed accrual- based earnings management activities in firms.
 Results: However, firms audited by big four auditors are more engaged in costly real earnings’ management activities. The study used a sample of non-financial listed firms in Pakistan over the period of 2009–2016. This study contributes to the field of corporate governance, where it provides deep insight to policy-makers who are interested in improving financial reporting quality in transnational economies.

Earnings Management in Firms with Data Security Breaches

ABSTRACT Anecdotal research suggests that management is concerned about how Data Security Breaches (DSBs) impact a firm's financial performance. We investigate: whether managers in DSB firms manipulate earnings through real earnings management (REM) and/or accrual-based earnings management (AEM); how breach type, disclosure delay, and external monitoring impact earnings management activities; and how earnings management activities influence a DSB firm's performance. Using a propensity score matched sample, results suggest that DSB firms are more likely to manipulate earnings via REM, but not AEM. Additionally, we find that DSB firms engage in REM through cutting discretionary expenses, decreasing discretionary cash spending, and reducing the cost of goods sold through overproduction. We find some evidence that firms are more likely to increase REM when DSBs involve financial information or when firms delay the DSB disclosure or have low analyst coverage. We provide evidence that REM activities lead to lower subsequent performance in DSB firms. Data Availability: The data used are publicly available from the sources cited in the text.

Pengaruh Profitabilitas terhadap Manajemen Laba

Financial report produce information that can be used for decision made by internal such as management and employees and external such as investor, creditors and the government. However, sometimes users of financial statements are often concerned on earnings information without keep attention to the procedures used to make company profit information . This causes management to take earnings management actions. The purpose of this study was to determine the effect of profitability (Return on Asset – ROA, Return on Equity – ROE and Net Profit Margin – NPM) on earnings management in banking companies listed on Bursa Efek Indonesia (BEI). The sample used in this research is 23 banking companies listed on Bursa Efek Indonesia (BEI) within 2 years starting from 2016-2017. The research result shows that Return on Asset – ROA and Return on Equity – ROE has a significant positive effect on earning management, and Net Profit Margin – NPM does not have a significant effect on earnings management.

Government-Linked Investment Companies and Real Earnings Management: Malaysian Evidence

This study examines the association between government-linked investment companies’ (GLICs’) shareholdings and real earnings management activities in Malaysia. Consistent with prior research, this study uses three proxies to measure real earnings management; abnormal cash flow from operations (RCFO), abnormal production costs (RPC), and abnormal discretionary expenses (RDE). This study segregates GLICs’ shareholdings into two categories; Federal Government Pension Investment Funds (FGPIF) and other GLICs (OFGLIC). Using a sample of 213 firm-year observations of Malaysian government-linked companies from 2010 to 2015, this study finds that FGPIF is a more effective monitoring mechanism than OFGLIC in limiting real earnings management. The findings also show that there is a significant and negative relationship between Employee Provident Fund (EPF), Khazanah Nasional Berhad (Khazanah), Permodalan Nasional Berhad (PNB) and RCFO and RPC. The evidence suggests that these three are the most effective government institutional investors in promoting corporate governance, which in turn limit real earning management activities in Malaysia. In general, the findings support the incentive alignment hypothesis, which argues that companies with government intervention are normally better governed.

The effect of gender composition in joint audits on earnings management

PurposeThis paper aims to examine the association between gender composition of joint auditor pairs and the quality of reported financial information. More specifically, the authors attempt to assess whether and how these gender compositions affect the client firms’ earnings management behavior.Design/methodology/approachThe authors utilized the unique institutional setting of Taiwan, where joint auditors are required by law. They studied the effect of gender in joint auditor pairs on accrual earnings management and real earnings management to achieve financial reporting objectives.FindingsEmpirical results indicate that engaging a woman as the lead auditor can constrain accrual earnings management, regardless of whether the joint auditor is male or female. The authors also found that all-male signing auditor pairs with industry expertise can significantly reduce accrual earnings management. The authors also documented that all-female signing auditor pairs and auditor industry expertise could drive clients to engage in real earnings management activities as an alternative to accrual earnings management.Originality/valueThe empirical results demonstrate that gender indeed plays a role in the quality of client’s reported financial information. Female auditors in a lead position and male auditors with industry expertise tend to be more successful in delivering better-quality audits.

An Examination of Prevalence of Earnings Management in Asia REITs

This study examines the prevalence of earnings management in Real Estate Investment Trust (REIT) funds in Asia. Discretionary Accruals (DA) is used as the measurement of earnings management. A panel data covering all REIT firms in three countries: Malaysia, Singapore and Hong Kong, from year 2007 to 2015 is used for this purpose. The results show all firms having the absolute value of discretionary accruals indicating that earnings management exists in Asian REITs. Further, independent t-test shows that earnings management activities are significantly prevalent in all these three countries despite the regulatory structure of REITs.

Camouflaged Indicators of Earnings Management

We argue that, in response to increased scrutiny and greater attention to accruals versus sales, firms become more likely to engage in accrual conversion (AC) cash management aimed at aligning cash and accruals with earnings and sales (e.g. by factoring of receivables). In doing so, they reduce the statistical power of standard indicators of accrual-based earnings management – in effect, camouflaging their earnings management activity. This proposition is of interest because many influential papers on earnings management have utilized accrual-based indicators to reach their conclusions. Our results indicate that firms indeed became more likely to engage in AC cash management after the passage of the Sarbanes-Oxley Act (SOX), and that this tendency was particularly pronounced among firms with strong incentives (or enhanced ability) to perform and hide earnings management. In particular, our findings suggest that the post-SOX decrease in standard measurements of accrual-based earnings management, identified in prior research, is partially attributable to firms’ increased engagement in AC cash management activity.

THE EFFECT OF OWNERSHIP STRUCTURE ON INCOME SMOOTHING

Income smoothing is an earnings management action by raising or lowering earnings to make it look more stable. This was done by company management for reasons not achieving the company's targets. In financial statements, a stable company profit illustrates that the company had good business continuity.Explained in the concept of corporate governance, institutional ownership, government ownership, and managerial ownership were believed to be able to minimize the occurrence of income smoothing. Therefore, this research was conducted to determine the effect of institutional ownership, government ownership, and managerial ownership with profitability and leverage control variables on income smoothing both simultaneously and partially in BUMN companies listed on the Indonesia Stock Exchange in 2012 - 2017.The technique used to select samples was purposive sampling technique. In the process, 10 research samples were obtained with a period of 6 years, so that 60 sample units were obtained. Then, to carry out the analysis, the analytical method used logistic regression analysis with the software used SPSS 23.0.After the analysis of this study, the results stated that simultaneous institutional ownership, government ownership, and managerial ownership with profitability control variables and leverage had a significant influence on income smoothing. Furthermore, partially the results of this study stated that government ownership had a significant effect on the negative direction of income smoothing. While the other two independent variables, namely institutional ownership and managerial ownership variables did not have a significant effect on income smoothing.

Pengaruh Good Corporate Governance dan Ukuran Perusahaan Pada Manajemen Laba

The purpose of this study was to determine the effect of good corporate governance and company size on earnings management in coal mining companies listed on the Indonesia Stock Exchange in 2013 - 2017. The research approach used in this study was a quantitative approach using secondary data. The sampling technique used is non probability sampling with a purposive sampling method. The number of samples used in this study were 40 samples. The analysis technique used is multiple linear regression. Based on the results of the study show that good corporate governance and company size influence earnings management. This research is expected to be able to provide additional empirical studies for further research that examines earnings management and makes a positive contribution to investors and companies in understanding the importance of implementing good corporate governance to reduce earnings management actions.
 Keywords: Good corporate governance, company size, earnings management.

The effect of the need for subsequent seasoned equity offerings on earnings management motivation

PurposeMost prior literature focuses on how managers’ immediate needs affect their current earnings management. The purpose of this paper is to expand this body of literature by investigating the managerial motivation in a multi-period setting. The authors believe that managers’ incentive to engage in earning management around current equity issues is not only determined by the companies’ immediate need, but that it is also determined by their longer-term financing need.Design/methodology/approachThe authors examine all issuances of common stock, whether they are issued as seasoned equity offerings or whether as a reissuance of previously repurchased stock. They believe that the motivations for earnings management are similar for all these various stock-issuance events, which result in an increase in the number of outstanding common stock items.FindingsThe results of this paper reveal that those firms with less of a need for subsequent equity issuances are more likely to engage in “income- increasing” earnings management before their equity issuances. Conversely, equity issuers with more of a need for subsequent equity issuances would be more concerned about the potential impact of current earnings management on their future reported earnings and, therefore, would be less likely to manage earnings.Originality/valueThis paper contributes to the literature by extending the findings of the prior literature, showing that managerial discretion does not only affect the total magnitude of earnings management, but that it also impacts the timing of the earnings management activities. Insights gained from our research may contribute to the literature and enable a better understanding of firms’ financial reporting strategy from a longer-run view.

CEO compensation and earnings management: Does gender really matters?

A number of earlier studies suggest that earnings quality improves when females are in senior management because of gender differences in risk-taking and ethical attitude. We extend this literature by using gender socialization theory and agency theory to examine the earnings management behavior of female Chief Executive Officers (CEOs) conditional on their equity incentives. We show that female CEOs do not necessarily reduce earnings management. At lower levels of equity-based compensation, female CEOs manipulate earnings to a lesser degree than their male counterparts. However, at higher levels of equity-based compensation, female and male CEOs exhibit very similar earnings management behaviors. Thus, given high equity incentives, all CEOs – regardless of gender – undertake a greater degree of earnings management activities. Consequently, there is little evidence that the gender of a CEO mitigates the propensity to increase the value of equity-based compensation by manipulating earnings.

Firm attributes, earnings management, and anti-corruption activities in Thai-listed firms

The Thailand Stock Exchange Commission now requires listed firms to disclose their anti-corruption activities to the public. We explore the unique Thai approach to corruption in three steps. First we study the relationship between anti-corruption activities and firm attributes. Second, we examine the relationship between anti-corruption activities and the quality of earnings. Lastly, we investigate whether the reporting of anti-corruption activity conveys new information to the Thai stock market. The results indicate that firms with superior performance attributes and good corporate governance have higher levels of anti-corruption progress. Earnings management is greater for firms with low levels of anti-corruption progress. We also find evidence that anti-corruption announcements are associated with significant market reactions. This suggests that anti-corruption announcements contain new information that investors consider relevant for firm values.

Firm attributes, earnings management, and anti-corruption activities in Thai-listed firms

The Thailand Stock Exchange Commission now requires listed firms to disclose their anti-corruption activities to the public. We explore the unique Thai approach to corruption in three steps. First we study the relationship between anti-corruption activities and firm attributes. Second, we examine the relationship between anti-corruption activities and the quality of earnings. Lastly, we investigate whether the reporting of anti-corruption activity conveys new information to the Thai stock market. The results indicate that firms with superior performance attributes and good corporate governance have higher levels of anti-corruption progress. Earnings management is greater for firms with low levels of anti-corruption progress. We also find evidence that anti-corruption announcements are associated with significant market reactions. This suggests that anti-corruption announcements contain new information that investors consider relevant for firm values.