Earnings Management Behavior Research Articles

Local Governments’ Earnings Management: Greek and Italian Evidence

The paper aims to examine earnings management practices in local governments, focusing on two Mediterranean countries, namely Greece and Italy that have comparable administration systems. According to public choice theory, the conflicting interests between politicians who pursue re-election and voters who monitor politicians’ actions to assess their alignment with social welfare create fertile ground for earnings management practices. A large sample of Greek and Italian local governments (LGs) is analysed; the study calculates discretionary accruals, using the Jones (1991) model, and relates them to several political variables. The Greek database covers the period from 2002 to 2015 with about 4,300 observations, and the Italian database includes the period from 2008 to 2015 with about 1,130 observations. The findings from the analysis evidence that LGs engage in earnings management, the principal factor being the electoral cycle, especially in the case of Greek municipalities. Considering that many public-sector entities have implemented accrual accounting systems, this study intends to examine earnings management behavior at the local government level, providing interesting findings for researchers and policymakers. A better understanding of the political factors and the financial conditions, which act as obstacles or facilitators, should work hand in hand with the accounting reforms. The usefulness of financial statements for decision making and control presupposes that they are of high quality, an attribute that can be impaired by earnings management. To the best of our knowledge, this is the first study to investigate earnings management behavior in different public-sector settings.

Earnings, Mergers and Acquisitions Under Pension Disclosure Standards

We examine whether managers alter earnings management behavior, in the case of mergers and acquisitions, following the introduction of new pension disclosure standards under SFAS 132R, effective December 15, 2003. We find managers do set lower rate of return (ERR) assumptions on pension assets under the new pension accounting standards. However, managers also become more sensitive to opportunities to boost reported earnings by inflating ERR. Managers more actively exploit such opportunities when pension assets are large relative to earnings measures, i.e., when potential gains from earnings management are large.

Earnings management under public offerings and private placements: evidence from China

In this study, we compare earnings management behaviour of Chinese public firms under public offerings and private placements. We find that, in the year before the issuance, public offerings firms exhibit more income-increasing earnings management than private placement firms. The result is opposite in the year after the issuance. We also find that, within private placements, firms that issued offerings to institutional investors exhibit higher income-increasing earnings management than firms that issued offerings only to non-institutional investors. These results suggest that firms manage earnings in response to regulatory requirements.

Earnings management under public offerings and private placements: evidence from China

In this study, we compare earnings management behaviour of Chinese public firms under public offerings and private placements. We find that, in the year before the issuance, public offerings firms exhibit more income-increasing earnings management than private placement firms. The result is opposite in the year after the issuance. We also find that, within private placements, firms that issued offerings to institutional investors exhibit higher income-increasing earnings management than firms that issued offerings only to non-institutional investors. These results suggest that firms manage earnings in response to regulatory requirements.

Human behavior analysis under financial information science

PurposeThe purpose of this paper is to investigate the relationships among corporate social responsibility (CSR), analyst forecast accuracy and firms’ earnings management behavior using US-based firms.Design/methodology/approachThe authors use the Kinder, Lydenberg, Domini (KLD) database to construct CSR performance scores and divide all firms into ten groups from high to low as a proxy for CSR performance. The authors obtained an initial sample of 33,364 firm-year observations from 1991 to 2012. Filtering for records which exist in the KLD, Compustat, and Center for Research in Security Prices databases lefts a total of 16,807 firm-year observations and CSR evaluation reports for 5,896 firms.FindingsThe authors find that high CSR-score firms have lower rates of analyst forecast error than their low CSR-score counterparts, suggesting that CSR performance is a useful means of forecasting earnings. Furthermore, firms with better CSR performance have significantly lower accrual-based earnings management behavior. However, the level of the manipulation behavior of real earnings management (REM) activities increased significantly in better CSR firms, suggesting that high CSR-score firms substituted REM methods for accrual-based methods. REM methods are consistent with the stipulations of the Sarbanes-Oxley Act and allow high CSR-score firms to better manipulate earnings behavior. These results hold after the authors control for various factors related to firm financial characteristics.Originality/valueOverall, the findings have important implications for investors and regulators to more easily assess firms’ earnings manipulation behavior and earnings stability under CSR performance and financial information in financial markets.

Accounting reforms and conservatism in earnings: Empirical evidence from listed Chinese companies

We examine the effects of the two major accounting reforms of 2001 and 2007 in China on conservatism in earnings using a variety of measures to ascertain the existence of conservatism and to gauge its degree. Our results provide evidence of different levels of conservatism in financial reporting in China during the period under investigation. We suggest that conservatism has generally existed in financial reporting in China since the 1998 accounting reform. However, the effects of the two accounting reforms on conservatism in earnings vary. Specifically, the 2001 accounting reforms significantly improved conservatism in earnings whereas the 2007 reforms reduced the extent of conservatism in earnings. We also note that conservatism in earnings rebounded following the 2007–09 global financial crisis. Furthermore, the 2001 accounting reforms have a greater positive impact on conservatism in earnings in regions with a lower level of legal protection for investors whereas the negative impact of the 2007 accounting reforms on conservatism in earnings is not affected by the level of legal protection for investors. These results suggest that accounting reforms that restrict managers’ abilities to conduct earnings management and improve conservatism in earnings serve as an important substitute mechanism for institutions of investor protection. Our findings provide useful insights into accounting conservatism and have important theoretical and practical implications for accounting regulators, investors, and researchers.

PENERAPAN IFRS DALAM PRAKTIK MANAJEMEN LABA PADA BANK PEMERINTAHAN INDONESIA

Banking sector must use accountability for report their financial statement, because external and internal users use it to evaluate the condition of the company. In other side if banks do earnings management practices it will not support for this purpose. IFRS (International Financial Reporting Standards) as the global financial standards that more accountable and transparance. This standard can push down the earnings management practice do by management. This research aims to obtain empirical evidence of IFRS implementation in earnings management practice, especially in Indonesia Government Banks during the period before and after using IFRS (2008-2015). The method of this research is using t-test by comparing data in 2008 to 2015. The result of this study indicates that there are differences in earnings management practices by management after implementation of IFRS. The contribution of this research is to get the empirical evidence related to the application of financial reporting standar based on IFRS, and producing transparency and accountable of the financial reports and decline in earnings management behavior.

Fair Value Exposure, Auditor Specialization, and Banks’ Discretionary Use of the Loan Loss Provision

In this study, we examine whether banks’ use of the loan loss provision (LLP) to manage earnings is associated with (a) the extent to which banks hold assets subject to fair value reporting and (b) the use of an industry specialist auditor. We find that banks with a greater proportion of assets subject to fair value reporting (i.e., higher fair value exposure) use less LLP-based earnings management but more transaction-based earnings management (i.e., earnings management achieved by timing the realization of gains/losses). We also find that banks engaging industry specialist auditors use less LLP-based earnings management. Our findings suggest that banks’ use of the LLP to manage earnings is more limited when they have access to alternative earnings management tools and when they engage an auditor with more industry knowledge. Our results should be informative to regulators, members of the banking industry, and academics interested in the earnings management behavior of banks.

Earnings management in interconnected networks: a perspective

PurposeThe purpose of this paper is to examine how firms manage earnings when firms are in interconnected networks, that is, when firms are interconnected to each other in a way that the survival of one firm is crucial to the survival of other firms connected to it.Design/methodology/approachThe paper employs network typology to provide some insight on the earnings management behaviour of firms in regulated and unregulated networks or systems.FindingsThe author shows that firms in the inner core of interconnected networks are more likely to rely on income-smoothing behaviour as a preferred form of earnings management because it stabilises the firm’s link with other firms in the network. In regulated networks, the author proposes a negative relationship between a firm’s network centrality and the number of earnings management strategies the manager can adopt. Also, the author proposes a positive relationship between a firm’s network centrality and the propensity to smooth earnings or income when firms are concerned about their reputation or regulatory scrutiny.Originality/valueThis paper is a brief note on earnings management, and is the first study to provide a perspective on how earnings management can be explained using a network typology.

The impact of IFRS adoption on management of bad debt expense and real operational activities: evidence from South Korea

This study examines whether the adoption of International Financial Reporting Standards in Korea affects earnings management behavior by focusing on the allowance for doubtful accounts. Adopting IFRS implies a change in approach whereby firms are required to build up an allowance only for incurred losses. Using a sample of 3817 firm-year observations of Korean listed companies covering 2000–2014, I find evidence that the discretionary portion of the allowance is decreased and that the opportunistic management of bad debt expense to meet crucial earnings targets is mitigated after the adoption of IFRS. Further, I find partial evidence that a shift from accrual-based to real earnings management may occur when the management of a specific accrual account is constrained by the adoption of IFRS.

BOARD STRUCTURE AND EARNINGS MANAGEMENT: EVIDENCE OF SOUTH EAST ASIA COUNTRIES CATEGORISED BY AGENCY COST LEVEL

Agency theory infers that investors will incur cost to make alignment on principal-agent interest. A critic, however, has pointed out that the conflict of interest between principal and agent is not the only cause for agency cost. Cultural context (Johnson & Droege, 2004) and legal system (La Porta, et al., 2000) are also found as contributing factors. This study is to empirically investigate how board size, board independency, audit committee size and audit committee independency affect the earnings quality in the context of low or high level agency cost country according to Transparency International’s corruption level and Hofstede’s cultural values. 538 firm-year across 6 South East Asian countries (Indonesia, Malaysia, Philippines, Singapore, Thailand, and Vietnam) are observed in this research. Five Different accrual models (Jones, 1991; Dechow, Sloan, & Sweeney, Detecting Earnings Management, 1995; Kasznik, 1999; Dechow, Richardson, & Tuna, Earnings management and costs to investors from firms meeting or slightly exceeding benchmarks, 2002; Dechow & Dichev, The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors, 2002) are used to generate abnormal accruals which will be used as proxy for earnings management while to generate suitable factors from corporate governance variables, principal component analysis (PCA) is employed. Results indicate that (1) earnings management is efficient; (2) size and independency of Board of Director and audit committee are effective in reducing earnings management behaviour; (3) the management of firms operating in higher agency cost context will take advantage from the structure of corporate governance (size and independency of Board of Directors and audit committee) to conduct earnings management. Additionally, it is also found that bigger size (higher leverage) firms perform less (more) accounting discretion compared to their counterparts.

Earnings Management and Executives' Compensation Contracts in the Macroeconomic Fluctuations

Under the background of severe macro-economic fluctuations around 2008, this paper examines changes in earnings management strategies carried out by Chinese firms in the purpose of the achievement of expected executive compensation. The results based on the panel data of 499 A-share listed companies from 2003 to 2014 indicate that during the upturn period before the financial crisis, the accrual earnings management incents the executive compensation significantly, while real earnings management results in the obvious suppression of the increase in executive compensation. During the downturn period after the financial crisis, the incentive effect of accrual earnings management on executive compensation is attenuated, and the suppression effect of real earnings management is attenuated as well. The private firms have the greatest reduction in the sensitivity of earnings management to executive compensation followed by local state-owned firms, and the national state-owned firms have the smallest reduction. Further studies indicate that private firms changed earnings management strategies for compensation immediately after the financial crisis, while state-owned firms held on the earnings management behavior until the national economic incentive schemes have finished completely. The conclusions show macroeconomic depression lowers the executives' prospects on high-level compensation, thereby incenting them to adopt more risky earnings management strategies and leaving hidden danger in firm long-term development.

Accrual and real-based earnings management by UK acquirers

PurposeThis study aims to investigate the occurrence of pre-merger earnings management for a sample of 197 stock- and cash-financed UK acquirers between 1990 and 2009. It also examines the earnings management behaviour around the change in the Corporate Governance Code in 2003 based on the Higgs recommendations.Design/methodology/approachMean and median accrual- and real-based manipulation are examined in the period before the announcement of a merger and acquisition. These are compared across stock and cash acquirers as well as before and after the implementation of the Higgs recommendations. Logistic regressions are also run to examine accrual- and real-based manipulation across stock and cash acquirers after controlling for variables that may affect the acquisition type.FindingsThe study found some evidence of upward pre-merger accrual-based earnings management by stock-financed acquirers, which is in line with the findings of Botsari and Meeks (2008). Furthermore, no significant changes were found in the post-Higgs period, which indicates that the recommendations put forth by Higgs may not have been successful in mitigating earnings management. The evidence also shows that cash bidders engage in pre-merger real earnings manipulation through lower discretionary expenses, possibly to enhance cash availability for the bid.Practical implicationsThe findings in this study confirm earnings management exists around mergers and acquisitions and provide some evidence that the recommendations set out in the Higgs Report do not appear to have mitigated earnings management activities. This is of interest to regulators as well as investors and academicians.Originality/valueThis provides the first analysis in the UK examining the use of real-based earnings management activities by UK acquirers. It also extends prior research around corporate governance changes that occurred in the UK.

Managerial reporting behavior around exchange switching: Consideration of current and future performance

By examining firms switching trading markets from the NASDAQ or AMEX to the NYSE and from the NASDAQ to the AMEX, we find that switching firms typically report significant positive abnormal accruals in the year preceding exchange switching. The pre-switching abnormal accruals are negatively associated with post-switching stock and operating performance, with the association driven mainly by firms with poor earnings in both current and future periods. The results suggest that pre-switching earnings management behavior, on average, supports the managerial opportunism, but not the signaling, intent. In further analysis, we find some evidence that firms with good performance in both current and future periods tend to choose income-decreasing reporting to avoid competition and/or mitigate adverse political attention.

PENGARUH EARNINGS MANAGEMENT TERHADAP FUTURE PROFITABILITY TERKAIT DENGAN OWNERSHIP STRUCTURE, FIRM SIZE DAN CORPORATE GOVERNANCE PRACTICES

This study aims to determine how the effect of earnings management on future profitability business entity engaged in the manufacturing sector listed on the Indonesia Stock Exchange, and how the effects of the ownership structure, company size, and the practice of corporate governance (proxied by the audit quality, independent board member and audit committee) regarding the impact of earnings management on the future profitability of manufacturing sector enterprises listed on the Stock Exchange. This study used a sample of manufacturing sector companies listed on the Indonesia Stock Exchange in the period 2008-2010. The samples used in this study were 262 observations. The sampling method used was probability sampling - judgment / purposive sampling. Independent variables used in this study are earnings management (proxied by the CFO, NDAC, and DAC), ownership structure (proxied by DFAM and INST), firmsize, and corporate governance practices (proxied by the AUDIT, BOD, and AUDCOM). The dependent variable in this study is the future profitability proxied by the variable "and CFOT earnt + 1 + 1. The results of this study were (1) earnings management proved to have a significant impact on the future profitability of manufacturing sector enterprises. The influence that appears different depending on the proxy used; (2) The ownership structure did not have an influence on the behavior of earnings management related to future profitability of manufacturing sector enterprises; (3) firmsize not affect earnings management behaviors related to future profitability of manufacturing sector enterprises; overall corporate governance practices are not effective in influencing the behavior of earnings management related to the future profitability of manufacturing sector enterprises. Keywords : future profitability, earnings management, ownership structure, corporate governance practice

PENGARUH AKTIVA PAJAK TANGGUHAN TERHADAP MANAJEMEN LABA PERUSAHAAN INDUSTRI MANUFAKTUR BASIC INDUSTRI YANG TERDAFTAR DI BURSA EFEK INDONESIA

Agent conflicts that result in opportunistic management that will result in reported earnings, which will cause the company's value to decrease in the future. Deferred tax assets occur when accounting income is less than fiscal profit due to temporary differences. The smaller accounting earnings than the fiscal profit resulted in the company being able to postpone taxes in the future period. However, if the fiscal profit may not be available in sufficient quantities to be compensated with the balance of the tax loss carry forward, or where possible the realization of future tax benefits with a probability of less than 50 per cent, deferred tax assets are not recognized and the company will record the reserves Deferred tax assets.
 Other problems also arise when the company has a large accounting income (Book Income) in comparison with the fiscal (Taxable Income) earnings in the financial statements. Problems in these conditions include companies, especially companies that have Go Public on its management will conduct earnings management as a fraud (fraud) relation in tax payment or reporting tax payable on the company.
 Companies that have a higher account income (Income Income) than a fiscal profit (Taxable Income) tendency to manage earnings at the company will be high in order to avoid large tax payments.
 This research is feasible to find empirical evidence whether the ownership of the deferred tax of the company or the difference between the Company's Book Income and Taxable Income affects Profit Management. The results of the research found that Deferred Tax Assets did not affect the Earning Management, Size did not affect the Earning Management, Growth (growth) did not affect the Earning Management, Leverage has no effect on Earning Management, Simultaneously Deferred Tax Assets, Size, Growth and Leverage Has no effect on earnings management for basic manufacturing industries for 2014 and 2015.
 Keyword: Deferred Tax Asset, Profit Management (Earning Management), Size, Growth, Leverage.

Consequence of loan loss provisions on earnings management behaviour: A study on the best African commercial banks

This study aimed at analysing the relationship between loan loss provision (LLP) and earnings management in the African commercial banks. The study selected the 11 banks among the 32 best commercial banks as identified by the Global Finance Magazine in 2014. These 11 banks are available online in the Bureau van Dijk Bankscope data and helped observe 10 years (2004-2013, of which 2003 is the base) financial statements, which accounts 34.38% of the 32 best banks. Accounting data derived from 11 years audited financial statements were used; 110 bank-year observations. A two stage panel regression, partial and pairwise correlation, and independent t-test were applied in order to analyse the relationship between the discretionary LLP (DLLP) and earnings management. Accordingly, the study found that loan to deposit (LD), return on asset (ROA), and earnings before tax and provision (EBTP) significantly influence the DLLP. Besides, banks with high premanaged earnings and well-capital more indulge in the DLLP. The study supports empirical findings on income smoothing and external financing hypotheses, but not the capital management hypothesis. Finally, further research on this topic is recommended, among others, by taking relatively large bank-year observations.

Do managers manipulate earnings to influence credit rating agencies’ decisions?

PurposeThis study aims to investigate whether firms engage in earnings management behavior that attempts to manipulate Credit Rating Agency (CRA) perceptions during the Watchlist process and, if so, whether earnings management behavior appears to influence CRAs’ decisions.Design/methodology/approachTo measure earnings management activities, this paper computes accrual-based and real earnings management measures in the year or in the quarter immediately before the Watchlist resolutions for all negative and positive Watchlist firms. To examine the association between the levels of earnings management and Watchlist resolutions, a logit model is applied to the data obtained from a sample of Watchlist firms.FindingsSome evidence suggests that managers in Watchlist firms manage earnings in attempts to gain favorable Watchlist treatment. The findings are consistent with the Graham et al.’s (2005) survey evidence, which shows that one of the primary reasons for earnings management is to gain (or preserve) a desirable rating. In addition, CRAs appear to be misled by these attempts during the negative Watchlist process period.Research limitations/implicationsThe findings support SEC’s (2011, 2013a, 2013b) rules to reduce its reliance on credit ratings and the recent regulation reforms concerning the competition in the rating industry [the Credit Rating Agency Reform Act (2006)], and concerning conflicts of interest of CRAs among others [Dodd–Frank Wall Street Reform and Consumer Protection Act (2010)].Originality/valueWhile many studies examine whether managers use discretionary accruals as a tool to manage earnings to obtain favorable ratings, those studies do not consider manipulation of real operating activities to manage earnings and CRA perceptions.

MANAJEMEN LABA PADA PERUSAHAAN DENGAN KELUARGA SEBAGAI PEMILIK ULTIMAT

The objective of this study is to determine the influence of family ownership on the earnings management with leverage and firm size as control variables. This study focused on manufacturing companies which has family as the ultimate owner of the company. The sample of this stuacturing companies listed in the Indonesia Stock Exchange and published its annual report during 2008-2014 period. The findings of this research indicated that family ownership has influence on the behavior of earnings management in companies with family as ultimate owner, which means that the percentage of shares owned by the family affect the magnitude of earnings management conducted by the company. The results also show that leverage has no effect on the behavior of earnings management in companies with family as ultimate owner, meaning the financing ratio that comes from the ratio of debt to equity can not affect the magnitude of earnings management conducted by the company. Lastly, company Size was found to have influence on earnings management behavior, which means that the size of firm can affect the the magnitude of earnings management conducted by the company.
 Keywords: earnings management, family ownership, leverage, company size

The Type I Versus Type II Agency Conflict on Earnings Management

Tis study aims to detect the background of earnings management behavior in which it shows the tendency of type I or II agency conflict. The high ownership concentration of firms in In-donesia leads type II agency conflict, but the good corporate governance formulation assumes conflict between management and shareholders. This study uses published data in IDX from 2009–2014. TThe result reveals that reputation quality has negative significant correlation to earnings management behaviors, but corporate governance quality has insignificant correlation to earnings management, except percentage of independent commissioner board in moder-ate level. It has implication that management faces type II agency conflict. The majority may monitor management directly, so the finding reveals that independent commissioner board’s function is not optimum as part of corporate governance mechanism. According to the evi-dence, corporate governance formulation, especially in Indonesia, should be needed for reduc-ing earnings management on type II tendency.