Earnings Management Behavior Research Articles

Climate change regulation compliance and earnings management

Purpose This study investigates how firms responded to the compliance costs imposed by the US Nitrogen Oxides Budget Trading Program (NBP), a regulatory initiative aimed at reducing climate-related air pollution. Specifically, it examines whether affected firms used real and/or accrual-based earnings management to offset the adverse effects on financial reporting. Design/methodology/approach Using a difference-in-differences regression framework, the authors compare manufacturing firms headquartered in 11 NBP-compliant states with those in noncompliant states. The authors test for changes in earnings management behavior using ordinary least squares, Propensity Score Matching and the Generalized Method of Moments (GMM), ensuring robustness across methods. Findings Results show that the NBP led to significant increases in real earnings management, particularly through inventory overproduction and reductions in discretionary expenditures (Selling, General and Administrative Expenses and Research and Development Expenses). The impact on accrual-based earnings management was limited. Practical implications This study highlights that even well-designed environmental regulations can have unintended financial reporting consequences, as firms seek to preserve short-term profitability. Policymakers should account for such behavioral responses when designing compliance regimes. Originality/value This study makes a unique contribution to the literature on climate policy and earnings quality by demonstrating how compliance costs from environmental regulation prompt strategic financial reporting responses. It also contributes to understanding the substitution between real and accrual-based earnings management.

The impact of IFRS13 on earnings management of IAS39 reclassifying firms following the 2008 financial crisis

Purpose The purpose of this paper is to determine the effect of the “IFRS13: Fair value measurement” standard on earnings management behavior of IAS39 reclassifying firms. Design/methodology/approach The authors assess accrual-based earnings management following the Kothari et al.’s (2005) model. Real earnings management is identified by a comprehensive measure that combines overproduction, sales manipulation and discretionary expenditures. The authors measure the impact of “IFRS13: Fair Value Measurement” adoption on earnings management using Mann–Whitney’s comparison tests and simultaneous equation systems. Findings The findings show that IAS39 reclassifying firms increase their accounting earnings management before adopting “IFRS13: Fair Value Measurement.” However, this accounting manipulation diminishes after implementing this standard. IAS39 reclassifying firms switch to real earnings management alternatives. Research limitations/implications First, the study examined the two earnings management practices of companies that have adopted IAS39 amendments, yet it did not focus on the amount subject to manipulation because of the reclassification of assets. Second, the study did not distinguish between the different levels of fair value hierarchy when determining the impact of “IFRS13: Fair Value Measurement” adoption on earnings management. Practical implications These findings support the decisions of accounting standards setters to address untraceable recognition and measurement choices inherent in accounting standards. Originality/value The authors explore companies that took advantage of the positive effect of the IAS39 amendments on earnings before and after “IFRS13: Fair Value Measurement” adoption. The most important contribution of this study is to determine whether or not “IFRS13: Fair Value Measurement” reduces the accounting flexibility used by IAS39 reclassifying firms. Therefore, the specific aim is to examine the earnings management behavior of companies that benefited from the flexibility of the reclassification offered by the IAS39 amendments as an accounting manipulation instrument before and after IFRS13 standard adoption. Previous studies have not examined this effect.

Earnings management behavior rural banks: The role of moral character based on religiosity

The purpose of the study is the impact of moral character based on religiosity on earnings management behavior through the Theory of Planned Behavior (TPB). This study was conducted in Indonesia Rural Bank. The research method uses a quantitative approach with PLS SEM analysis of data collected from 257 Rural Bank Directors in Indonesia. The main results of the study are the moral character based on religiosity significantly influences earnings management behavior both directly and indirectly through TPB. Despite strong moral character based on religiosity, individuals with expertise in accounting policies may still engage in earnings management. Based on the results obtained conclude that regulatory measures alone are insufficient to curb this behavior, a spiritual approach is essential to reinforce ethical business conduct, emphasizing integrity and honesty. This research concludes that building individual commitment through honesty and integrity must come from personal beliefs, by complying with applicable regulations in preparing financial reports in order to create an ethical and moral business environment. The practical implication of this study is the importance of a spiritual approach that emphasizes the values of integrity and honesty in fostering individual commitment, alongside regulatory measures, to establish an ethical and moral business environment in financial reporting management.

The Impact of International Financial Reporting Standards (IFRS) On Earnings Management Behavior: Evidence from Commercial Banks in the Kingdom of Saudi Arabia

The Impact of International Financial Reporting Standards (IFRS) On Earnings Management Behavior: Evidence from Commercial Banks in the Kingdom of Saudi Arabia

Empirical Evidence About Earnings Management Behaviour Under the Covid-19 Period in Algerian Companies

This study explores the influence of the Covid-19 period on earnings management behaviour (EM) for 150 Algerian companies. The period of study (2018 to 2021) was divided into the prepandemic period (2018 and 2019) and the pandemic period (2020 and 2021). The study used two measures for earnings management: discretionary accruals (accounting EM) and abnormal cash flows (real EM). The results indicate that accounting EM decreased during Covid-19 compared to pre-Covid-19. But for real EM, it was the opposite; it has seen an increase during Covid-19. These results have many implications regarding the commitments of various contributors to preparing financial information and other related parties to ensure the accuracy of financial reporting during periods of crisis. More specifically, accounting standards setters should issue additional explanations regarding the accounting for some items, and auditors should extend the range of verification when certifying financial statements.

Short selling mechanism and financial fraud——Analysis based on the perspective of earnings management

This study focuses on the influence of the short-selling mechanism (SEM) on earnings management behavior of listed companies, particularly the change in the earnings management (EM) level of listed companies after the implementation of the margin financing (MF) policy. The research is based on data from China’s securities market spanning from 2007 to 2022, and employs the difference-in-differences (DID) model for empirical analysis. The study found that the EM behavior of companies that became subject to both MF and short selling decreased significantly after the implementation of the SEM. The results indicate that the SEM, as a market supervision tool, effectively curtails opportunistic behavior by management and enhances the transparency and quality of accounting information. This study offers a new perspective on the role of SEM in corporate governance and market supervision, and provides a foundation for relevant policy formulation.

The role of religiosity on blockholders involvement in earnings management: evidence from Indonesia

Purpose Prior studies on blockholders involvement in earnings management behavior have given rise to alignment and entrenchment perspectives. The alignment perspective states that blockholders are an effective control to reduce earnings management behavior. In contrast, the entrenchment perspective states that blockholders act opportunistically and encourage earnings management behavior. Firms in Indonesia generally have concentrated shares, which is probably in line with the entrenchment perspective. Therefore, this study aims to examine the influence of blockholders on earnings management and the role of religiosity as a moderator of the influence of blockholders on earnings management. Design/methodology/approach This study uses multiple linear and multi-group regression to analyze 2,238 firm-year observations for firms listed on the Indonesia Stock Exchange period 2015–2021. Multi-group regression is used to test the effect of religiosity on the relationship between blockholders and earnings management. Findings The finding of this study is that religiosity can mitigate the involvement of blockholders in earnings management, where blockholders positively influence earnings management in non-religious but not religious firms. This finding is expected to solve the agency problem between management with shareholders and the majority with minority shareholders. Practical implications Firms should apply religious values in their business activities to prevent or minimize profit manipulation. Another implication is that investors can glance at Sharia stocks when investing because they have lower earnings management or higher-quality financial reports. Originality/value To the best of the authors’ knowledge, this study may be the first to investigate the role of religiosity by comparing the effect of blockholders on earnings management between religious and non-religious firms. This study proves that religiosity is a new alternative to mitigating blockholders involvement in earning management and agency problems.

Study of the governance effect of institutional investor information network on earnings management

ABSTRACT Institutional investors jointly hold heavy positions can form an information network, and there is information sharing in the social network. This paper empirically tests the impact of institutional investor information sharing on earnings management behavior of listed companies. The result shows that information sharing among institutional investors can significantly inhibit earnings management behavior. The mechanism analysis shows that the effect of institutional investor information sharing on earnings management is mainly realized by affecting the quality of corporate information disclosure and investor sentiment. Further analysis shows that the impact of institutional investor information sharing on earnings management is obviously heterogeneous, and the restraining effect of institutional investor information sharing on earnings management is stronger in companies with low legal level, good information environment, good internal governance, no separation of two rights, enterprise growth stage and no relationship between government and enterprise. Based on the social network theory, this paper analyzes the influence of the interaction between institutional investors, which provides reference for further understanding the governance role of institutional investors and stabilizing the capital market.

CEO Characteristics and Earnings Management: A Study of Manager Tenure, Age, Gender, and Overconfidence

Abstract Corporate scandals over the past few decades underline the importance of robust corporate governance mechanisms to monitor and control managerial behaviour. Earnings management, where accounting techniques are used to present a company’s financial position more favourably than it actually is, can affect financial reporting quality and the company’s financial reputation. Our study explores how CEO characteristics, such as tenure, gender, age and overconfidence, influence corporate earnings management. Using earnings and executive characteristics data for A-class companies listed in Shanghai and Shenzhen stock exchanges between 2016 and 2020, the research employs multiple regression analysis to empirically analyse the impact of manager characteristics on corporate earnings management. We find that CEOs with longer tenure, male and high self-confidence are more likely to participate in corporate earnings management. Additionally, firm size and asset-liability ratio are positively related to corporate earnings management behavior. While previous studies mainly use data from US companies, this research contributes to the literature by using data from non-US companies, addressing the call for more empirical studies to understand how top executives’ demographic characteristics impact earnings management in different contexts.

Earnings management in state-owned enterprises in Indonesia

This research aims to examine the effect of bonus contracts that use financial and non-financial performance measures and examine the impact of implementing AKHLAK culture on earnings management in state-owned enterprises. In addition, this research aims to evaluate the effectiveness of implementing GCG in mitigating earnings management behaviour. To achieve the objectives of this research, we used a sample of 32 state-owned companies from 2017 to 2022 with a total of 178 data points. The analysis uses path examination to measure the influence between variables. We have found that Chief Executive Officer (CEO) career and culture negatively influence earnings management, whereas bonuses have no effect. We have also found that GCG moderates bonuses on earnings management but does not moderate CEO career and culture on earnings management. These findings have demonstrated that CEO bonus contracts based on financial and non-financial performance measures do not motivate CEOs to manage accrual earnings. The results of this research provide input for the government to increase the implementation of AKHLAK culture and appoint career directors in state-owned companies. The results of this research also provide empirical evidence that giving bonuses does not affect earnings management behaviour of the bonus contract is based on financial and non-financial performance. The results of this research are expected to provide advice to shareholders on how to use financial and non-financial measures in bonus contracts simultaneously.

Succession and real earnings management in family businesses: is socioemotional wealth a predictor for Cooking the Books?

PurposeEarnings management is a practice that is detrimental to future business viability. For family businesses, viability in the form of succession, continues to be difficult. The motivation to use earnings management is different in family businesses as they have unique pressures and characteristics. The purpose of this paper is to identify if the level of socioemotional wealth in a family business impacts real earnings management behavior during succession. The goal is to better understand what impacts the use of real earnings management for family businesses so that it can be curtailed, enhancing future business viability and successful generational transfer.Design/methodology/approachA sample of 200 small and medium size business owners participated in an experiment. Binary logistic regression was used to identify any relationship between SEW, succession and REM.FindingsThis study finds that socioemotional wealth and succession impact real earnings management behavior in family firms. When succession is not present, the study finds that companies with high socioemotional wealth are less likely to engage in real earnings management than low socioemotional wealth companies. However, when succession is present, the engagement in REM for companies with low socioemotional wealth drops significantly while the behavior of those with high socioemotional does not materially change.Practical implicationsUnderstanding how to position a family business for succession realization is important. We do not know exactly what factors impact the failure rate but identifying how facets of the businesses (SEW and succession) might impact REM and ultimately financial performance will be important to small and medium-sized family business owners in the US as they begin their succession journey.Originality/valueThe study’s experimental design using participants in a US family business, offers an opportunity to better understand this critical portion of the economy and the variables that potentially impact real earnings management decisions. It contributes to the literature by offering potential reasons behind the conflicting findings on REM in family businesses and the impact of SEW on earnings management. It offers a unique view of behavior within different family businesses as opposed to a comparison often found in the literature between family and non-family firms. It also contributes to a gap in literature for US small to medium family businesses.

Time will tell the truth: Performance commitments and earnings management in M&A

Time will tell the truth: Performance commitments and earnings management in M&A

Earnings management before mergers and acquisitions: Evidence from the U.S. property‐casualty insurance industry

AbstractThis paper examines the earnings management behavior of target insurers before mergers and acquisitions by investigating their reserving conservatism compared to control insurers. Contrary to the expectation that acquisition targets would manipulate their earnings to increase acquisition premiums, we find that target insurers are generally more conservative in their loss reserving practices before acquisitions than control firms. This finding provides support for the effectiveness of due diligence and the contractual risk shifting arguments, and the result holds regardless of whether acquirers are insurers or non‐insurers. Furthermore, we discover that target loss reserve conservatism is negatively associated with target CEO turnover post‐acquisition. In line with existing literature, we also find evidence suggesting that targets involved in stock acquisitions tend to adopt a less conservative reserving strategy than in deals that do not include stock payments.

코스닥 신규상장 기업의 선택적 경영성과 요건 충족과 이익조정의 관련성에 관한 연구

[Purpose] This study analyses whether the behavior of earnings management according to satisfied number of performance requirement when initial public offering for listed companies registered in the KOSDAQ market. [Methodology] The sample of this study is 314 firm－year registered in the KOSDAQ market and period was set from 2013 to 2022 because the same requirement can be applied in IPO. The proxy for earnings management is discretionary accruals estimated by the Kothari et al.(2005) model and it was analyzed whether there is a significant relationship with satisfied number of performance requirement by taking dummy variables, such as ① ROE 10% or more, ② Net income of 2 billion(KRW) or more, ③ Sales of 10 billion(KRW) or more, and ④ sales growth 20% or more. [Findings] As a result of regression analysis, the level of discretionary accruals was different by satisfied number of performance requirement. Specifically, in case only one or two are met the condition to performance requirements dummy variable has a positive coefficient and is significant at the 1% level. On the other hand, when the number of performance requirements is relatively large (three or four are met) showed that the dummy variable has a significant negative coefficient at the 5% level. These results suggest that earnings management was more aggressive when performance in the business year immediately before IPO disclosure was low, but if performance requirements was sufficiently met, a strategy was implemented to prevent excessive earnings－inflating adjustments or reduce earnings. [Implications] This study is different in presenting empirical results that the intention to earnings management may vary depending on the degree that meets the performance requirements. This study suggests the possibility that ‘at least one satisfaction’ in performance requirements can be make bad use by top management as opportunistic intentions. Therefore, this study contribute to suggesting that a minimum regulatory mechanism related to performance requirements is needed in order to stabilize the market and protect investors.

Text-based multidimensional financial constraints and earnings management behaviour

Using unidimensional accounting-based measures of financial constraints, prior literature finds that constrained firms engage in significantly higher accrual earnings management. We argue that a firm may face different degrees of financial constraints in the equity and debt market, which cannot be captured through unidimensional measures. We examine this association using a novel multi-dimensional text-based measure of equity and debt market constraints. Considering 46,149 firm-year observations (7096 unique firms) of US-listed firms over the period 1997–2015, we find the relationship between equity-constraint (debt-constraint) and earnings management is positive (negative), respectively. Furthermore, we show how investment growth opportunity moderates this relationship and how firm’s cash holdings, life cycle stage, and R&D intensity influence this relationship. Our results remain robust with, alternative specifications of earnings management and endogeneity concerns. JEL Classification: G31, G32, G34, M41

Earnings management, key audit matters and audit report readability

PurposeAccording to the management obfuscation hypothesis, managers have incentives to influence the audit reports’ communicative value. This study aims to examine the relationship between corporate earnings management and the readability of Chinese-text audit reports and the impact of key audit matter (KAM) disclosure requirements on this relationship.Design/methodology/approachThis research adopts Taiwanese firms from 2010 to 2019 to investigate the association between earnings management and readability of Chinese-text audit reports within the framework of the KAM disclosure requirements implemented in 2016.FindingsThe findings show that auditors tend to issue less readable audit reports to firms undertaking earnings management, particularly after introducing KAM disclosures. Additional analyses indicate that such adverse impacts of client earnings management on audit report readability have become more pronounced for firms audited by a newly pointed or long-tenure lead audit partner, with high business risk, poor monitoring of governance mechanisms or a large amount of nonaudit services. These results suggest that auditor partners may compromise auditor independence and use flexible narratives in audit reports as a form of moral insurance.Practical implicationsAs auditors may manage audit report readability to reduce audit liability, authorities must formulate policies concerning audit report disclosure to strengthen its communicative value and simplify language usage. Additionally, authorities should strengthen quality control standards concerning auditor independence to reduce auditor pressure from clients’ economic importance.Originality/valueThis study provides valuable insights into auditors' responses to corporate earnings management behavior, particularly regarding the interplay between earnings management, audit report quality and regulatory changes, thus expanding our understanding of the dynamics within the auditing profession.

Determinants of R&D Value Reporting Bias: An Empirical Study in the EU

This study investigates the determinants of R&D value reporting bias in technology sector entities from six EU countries, including Germany and France, using data from 188 entities between 2006 and 2023. The research employs a mixed-method approach, including Pearson correlations, mixed model regressions, and binary logistic regressions, to analyse the relationships between financial leverage ratios, earnings per share, and the performance of intangible assets. The findings indicate significant correlations between financial structure metrics and the Net Present Value (NPV) ratios of intangible assets, suggesting that higher debt levels relative to assets enhance the performance of internally generated intangibles, while increased debt-to-equity and debt-to-capital ratios have a negative impact. Additionally, the study reveals the influence of regional factors and auditor rank on financial performance, emphasizing the complex interplay between financial metrics and the valuation of intangible assets. These insights contribute to understanding earnings management behaviours and provide practical implications for financial management in R&D-intensive entities.

The real effects of M&As on targets’ peers

AbstractThis paper studies the real effects of targets’ acquisitions on their peers through investigating the real earnings management (REM) behavior of the targets’ rivals following the mergers and acquisitions (M&As). Using a difference‐in‐differences design, we find that, on average, rivals of acquisition targets would engage in more REM after M&A announcements. We further find that within rivals of the target, the post‐announcement increase in REM is more pronounced when: (1) the rival is relatively less similar to the target; (2) the rival serves as the targets’ rival more than once within a year; (3) the target earns a higher bidding premium or positive abnormal returns; or (4) the rival has the higher institutional ownership or more analyst following. Additional analyses reveal that rivals engaging in more REM would have a higher likelihood of being acquired in subsequent years and would be sold at higher premiums. We also find that targets’ rivals boost their short‐term performance by engaging in REM activities at the cost of their long‐term performance. Our results are robust to various robustness checks. Overall, our evidence suggests that an acquisition activity could have a real effect on the target's industry, i.e., the effect on the accounting choices of the whole industry.

Shariah compliance fatigue and earnings quality: evidence from MENA

PurposeThis research aims to examine the relations between Shariah compliance and earnings quality.Design/methodology/approachThe authors study three Shariah features: Shariah compliance status, level of Shariah compliance (H-Score) and Shariah compliance persistence. The sample consists of 463 firms from the Middle East and North Africa from 2011 to 2018. A variable determining the level of Shariah compliance was created in accordance with the methodology of S&P 500 Shariah and its underlying index, S&P 500. Then, a probate relapse study was created to identify the link between Shariah compliance and earnings quality.FindingsResults show that Shariah-compliant firms engage in lower earnings management compared to their Shariah-non-compliant counterparts. This paper reveals that Shariah compliance status and high level of Shariah compliance have significant positive association with earnings quality. The authors also find novel evidence that persistence of the Shariah-compliant status has a significant negative association with earnings quality.Practical implicationsThis study only examines firms listed on MENA stock markets. It is recommended to further study different markets in addition to the emerging Arab markets in order to compare and contrast the results. Further, larger sample observations from a greater date range can be used.Originality/valueFew studies have examined the earnings management behavior of Shariah-compliant firms vs Shariah-non-compliant ones in emerging markets; however, no study has focused on Shariah-compliant firms and their level of Shariah compliance. To the best of our knowledge, this is the first study which uses all four proxies for earnings quality in association with Shariah compliance and used new Shariah variables such as Level of Shariah Compliance and Persistent Shariah Compliance status.

TAX AVOIDANCE AND EARNINGS MANAGEMENT IN MALAYSIAN FIRMS: IMPACT OF TAX INCENTIVES

Understanding the relationship between tax avoidance and earnings management is crucial to evaluating tax policies and ensuring transparent financial reporting. Prior research has highlighted complexities and inconsistent findings, particularly concerning the impact of tax-related reporting incentives. This study addresses these issues by examining the influence of tax incentive recipient status on tax avoidance and earnings management among firms listed on the Kuala Lumpur Stock Exchange (KLSE). It examines whether firms receiving tax incentives from the Malaysian Investment Development Authority (MIDA) exhibit different earnings management behaviours than non-recipient firms. This study employs the effective tax rate (ETR) as a measure of tax avoidance and discretionary accruals (DEM) for earnings management. The dataset includes manually extracted financial information from firms listed on the KLSE for the financial year 2017 and a listing of tax incentive recipient firms from MIDA. Analytical techniques include ANOVA, independent samples t-test, and multiple regression analysis. The findings of this study suggest that higher tax avoidance relates to higher earnings management. Additionally, firms receiving tax incentives exhibit significantly higher ETRs than non-recipients. They are less likely to engage in earnings management, suggesting that tax incentives may deter aggressive financial reporting practices due to compliance pressures. The additional analysis indicates that tax incentives do not significantly moderate the relationship between tax avoidance and earnings management, implying that other pressures still play a crucial role. This study contributes to existing knowledge by emphasizing the need for robust regulatory frameworks that balance economic growth and financial reporting integrity.