Level Of Earnings Management Research Articles

The Impact of Corporate ESG Performance on Earnings Management

This paper selects listed companies from the Shanghai and Shenzhen A-share markets between 2009 and 2020 as the sample to empirically analyze the impact of corporate performance in ESG (Environmental, Social, and Governance) on the level of their earnings management activities. The study finds that the better the ESG performance, the lower the company's tendency to engage in real earnings management, significantly reducing the level of real earnings management. In contrast, the improvement in ESG performance increases accrual-based earnings management. Further analysis reveals that for non-state-owned enterprises, the restraining effect of ESG performance is more pronounced. All three dimensionsenvironment, social, and governancecan significantly increase corporate accrual-based earnings management. Compared to environmental responsibility, social responsibility and corporate governance are more effective in significantly reducing real earnings management.

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

This study investigates the impact of performance commitments on the earnings management levels of acquiring firms in the three years following mergers and acquisitions (M&As), as well as the resulting performance reversal phenomenon. The empirical results indicate that listed companies significantly increase their earnings management levels in the three years after making performance commitments. This suggests that firms may engage in upward earnings management during the commitment period to inflate profits and achieve the promised performance. Moreover, our findings reveal that M&A transactions involving stock payments and performance commitments exhibit even higher levels of earnings management. However, such practices are unsustainable; once the commitment period ends, the previous earnings management behavior is gradually rectified, leading to a performance reversal. Further analysis demonstrates that performance commitments result in a significant decline in companies' return on assets (ROA) in the fourth and fifth years post-M&A.

Employee share ownership and the nature of earnings management

ABSTRACT Using a sample of French listed companies, this article investigates whether employee share ownership (ESO) plays a role on the nature of earnings management (EM). Moreover, we aim to explore the documented ambiguous effects of EM and ESO on information asymmetry. Using an agency theory approach, we first observe that, in general, French companies use EM opportunistically rather than for informative purposes. Then, we find that ESO mitigates EM by 1) reducing the overall EM level and 2) making EM less opportunistic and more beneficial for the company.

Comparation of Earnings Quality Measures at Industries in the National Stock Exchange of India

Earnings quality has emerged as an important phenomenon for many types of investors looking to invest in stocks. There are different approaches to determine the level of earnings management in academic research on earnings quality. To quantify earnings quality, the present study used the four techniques suggested by Penman (2001), Barton and Simko (2002), Leuz et al. (2003), and Desai et al. (2006). Using a sample of 65 companies from six major industries on the National Stock Exchange over a 12-year period, this study seeks to determine whether there is any consistency among the four measures of earnings quality. The analysis showed that a single approach cannot be used to define an organization as high or low quality. Hence, this study sheds light on the inconsistency of earnings quality measurements and advises firm stakeholders to employ several indicators when making decisions. JEL Classification: G34; G38; M41

Public data accessibility and corporate maturity mismatch: Evidence from China

As the importance of public data to the real economy continues to be recognized, this study explores public data accessibility as a determinant of corporate maturity mismatch between investment and financing. Exploiting the staggered establishment of public data open platforms (PDOPs) across different cities in China, we observe a significant reduction in local firms' maturity mismatch following the establishment of PDOPs. The results remain robust even after conducting a battery of robustness tests, including placebo tests, matching analysis, as well as controlling for the influence of other major concurrent reforms and utilizing alternative measures for corporate maturity mismatch. Mechanism analysis indicates that the establishment of PDOPs contributes to an increase in the scale of long-term loans and an extension of the debt maturity structure. This suggests that enhanced public data accessibility effectively strengthens banks' information discernment capabilities. Cross-sectional analysis indicates that the effects are more pronounced in samples of private enterprises, companies with high levels of earnings management, fewer analysts covering, lower collateral values, and a higher proportion of local subsidiaries. Additionally, the economic consequence analysis reveals that the establishment of PDOPs ultimately helps to reduce corporate default risk. Finally, this study finds no evidence of potential spatial spillover effects from the establishment of PDOPs. This study offers a new perspective on understanding changes in corporate maturity mismatch, providing significant policy implications for preventing and mitigating financial risks.

Earnings management and judicial recovery: evidence for brazilian companies

Purpose: This study investigated the relationship between judicial recovery and insolvency with the Real Earnings Management (REM) level of publicly traded Brazilian companies in the period 2016-2020. Methodology: The estimated econometric model was panel data regression. The dependent variable was the level of REM measured based on Roychowdhury (2006), which estimates the manipulation of real activities through the analysis of abnormal movements in operating cash flow, discretionary expenses and production costs. The sample collected from 2016 to 2020 consists of 723 non-financial companies. Results: As main results, the study was able to demonstrate that there is an inverse relationship between judicial recovery and insolvency with earnings management. In other words, companies that are in judicial recovery or insolvent tend to have less earnings management. The findings of this research suggest that managers of companies undergoing judicial recovery have less incentive to engage in discretionary practices, as they are thus able to highlight their financial difficulties and obtain the judicial benefits of the process. Contributions of the Study: Although many studies evaluate the factors that influence earnings management, this work seeks to contribute to the study of accounting earnings management and uses an operational proxy, associating it with companies undergoing judicial recovery. Furthermore, with evidence of less earnings management by these companies, there is a possible improvement in the shareholders' perspective regarding the future of the company's finances, thus also contributing to investors' decision-making.

Governance through exit: Pension fund reform impact on real earnings management of portfolio companies

Theoretical models predict that the threat of outside blockholder exit can mitigate agency problems and force managers to undertake actions that would maximize firm value in the long run. We examine whether the institutional blockholder exit threat curbs managerial misbehavior and short-termism reflected in real earnings management. Our study exploits a natural experiment—the Polish pension fund reform of 2013 that encouraged pension funds to trade more actively and imposed a real threat of exit on their portfolio companies. Using a difference-in-differences approach, we provide evidence that the reform significantly decreased the level of real earnings management in “treated” companies, that is, companies with open-ended pension funds (OFEs) playing the role of blockholders. The effect was more significant for firms in a multiple blockholder setting, firms under common ownership, and firms with higher insider’s stakes. Moreover, we confirmed that treated companies that decreased real earnings management in the post-reform period experienced the increased long-term operating performance.

Evaluating the Impact of Digital Transformation and Sustainability Strategies on Earnings Management: A Text Mining Approach

Digital transformation has the potential to fundamentally change companies and create value. This study examines the impact of digital transformation and sustainability strategies on the earnings quality of Indonesian listed companies on three sectors: infrastructures, transportation and logistics, and consumer non-cyclicals. Using text mining techniques to measure intensity of digital transformation and sustainability strategies, we found that sustainability strategy shown in the company’s annual report reflects lower level of earnings management especially in accrual earnings management, while companies with digital transformation strategy, particularly in artificial intelligence technology, are less likely to engage real earnings management. Findings of this study provide insights into the effect of digital transformation and sustainability on the quality of accounting information and corporate governance, and offer implications for corporate digital transformation and government regulation.

Earnings management and dividend policy of listed firms in the Ho Chi Minh City stock exchange

Prior studies show that paying dividends limits private control benefits available to managers, which may restrict agency problems and the pos sibilities of managers manipulating earnings. This paper examines whether dividend policy has an impact on earnings management on a sample of listed firms on the Ho Chi Minh Stock Exchange in the period from 2012 to 2022. We use different proxies of earnings management, including accrual based and real earnings management. The results show that dividend pay ing firms have a lower level of earnings management than non-dividend paying firms. Besides, book-to-market equity ratio, firm size, leverage, re turn on assets, number of years listed and free cash flow also have impacts on earnings management. Our results are consistent when using different estimation methods, including OLS, fixed effects, random effects, GLS and GMM regressions with STATA 14. We offer some solutions for the govern ment, the firms and investors to better ensure and understand the quality of firms’ financial reporting.

Do socially responsible firms demonstrate a preference for using classification shifting to manage earnings?

Prior research finds socially responsible firms are less likely to engage in earnings management, suggesting that socially responsible firms seek to provide more transparent financial reports (Hong and Anderson 2011; Kim, Park, and Wier 2012; Hwang, Choi, Choi, and Lee 2022). We investigate whether managers of CSR firms demonstrate a preference for classification shifting when making trade-off decisions among earnings management methods. First, our results support prior studies that find the overall extent of earnings management is lower for CSR firms. However, this study focuses on the use of classification shifting relative to other forms of earnings management. We find a robust positive relation between CSR performance and the relative use of classification shifting. Our results suggest that while CSR firms engage in lower levels of earnings management they demonstrate a preference to choose classification shifting when engaging in earnings management. These findings are consistent with managers perceiving classification shifting as a less unethical tool relative to accruals earnings management or real activities manipulation. Subsequent analyses reveal that our results are most pronounced for firms with lower external monitoring where managers have the most freedom to make trade-off decisions among earnings management methods based on ethical considerations. Overall, by demonstrating a preference for classification shifting relative to other earnings management tools our study furthers our understanding of the role of ethical considerations in earnings management decisions.

Analyst coverage and real earnings management: Does IFRS adoption matter? UK evidence

This study examines the impact of analysts coverage on real earnings management (REM) decisions. The study further investigates the effect of mandatory IFRS adoption on the relationship between analyst coverage and REM. We constructed a sample of UK non-financial listed firms for the period 1997–2021. The results demonstrate that firms followed by a large number of financial analysts record higher levels of earnings management. This result supports the contention that high intensity of analyst coverage imposes extra pressure on firms' managers to meet analysts' earnings per share (EPS) expectations, motivating a higher level of earnings management. Contrary to expectations, the introduction of IFRS fails to strengthen the monitoring role of security analysts on firms' management: rather, managers utilize the inherent flexibility and available discretion in the principles-based IFRS to meet analysts’ benchmarks by means of REM activities. These results are robust after controlling endogeneity.

Does corporate governance moderate the impact of earnings management on capital structure of the listed corporations on Palestine and Amman Bourses

The purpose of this research is to investigate the moderating role of corporate governance on the relationship between earnings management and debt level in capital structure. The paper used a hypothesis-testing research approach to gather data from the annual reports of 13 industrial companies listed on Palestine Exchange and 25 Jordanian companies listed on Amman Stock Exchange from 2013 to 2020. Descriptive and inferential statistics were employed, along with correlation analysis to evaluate linear relationships between variables. The fixed and random effect regressions were utilized to develop the research model. In the case of Palestinian manufacturing firms, the results revealed that Earnings Management (EM) had a significant negative impact on debt level. According to the moderating role of Corporate Governance (CG), larger boards and the existence of female members on the board of directors causes an increase in the high-leverage impact of EM, whereas CEO duality mitigates the high-leverage impact. However, in the case of Jordanian manufacturing firms, EM showed an insignificant impact on debt level. Regarding the moderating role of CG, it was proved that the presence of female members on the board of directors increased the firm’s reliance on debt financing as a result of EM practices, while institutional investors mitigate the effect of EM on debt financing, leading to a decrease in reliance on debt. The findings of this research are suitable for the regulators while formulating policies on the Corporate Governance and the Impact of Earnings Management on Capital Structure. These findings have guided the policymakers that they should enhance their focus on Palestine and Jordan companies to test Corporate Governance Moderates the Impact of Earnings Management on Capital Structure. This study is also helpful for the new researcher while investigating this area in the future.

The Impact of Audit Quality on Earnings Management: Evidence from Listed Companies in Sri Lanka

Earnings Management (EM) is related to the manipulation of reported income through accounting practices and decisions. With the occurrence of numerous financial collapses and failures, the reliability of the audit function has been challenged, as auditors play a critical role in expressing an opinion on the financial statements. This study investigates the impact of Audit Quality on EM in Sri Lankan listed companies. This study employs Modified Jones model to examine earnings management practices through Discretionary Accruals (DA). The selected proxies of audit quality which are Length of Audit Tenure, Audit Firm Size and Auditor Independence are the independent variables. The data is collected from annual reports for the financial periods 2015 - 2020 and audit reports for the financial period 2012 - 2020 of listed companies on the Colombo Stock Exchange (CSE). This study employed descriptive statistics, correlation analysis, and multivariate analysis to analyze the data. Based on the quantitative analysis, the results demonstrated that the association between audit firm size and earnings management in Sri Lankan listed companies is negative and significant. It was found that the level of EM between companies using Big 4 auditors and those using non-Big 4 auditors is much lower. This study revealed that auditor independence and EM have a significant negative association. It was suggested that independent auditors have a greater ability to regulate and identify EM activities through company management. Further, this study exposed that there is an insignificant association between the length of audit tenure and earnings management. These findings are useful to shareholders in appointing or reappointing auditors. Furthermore, this study enables stakeholders, including regulatory bodies, to examine the presence of EM practices in listed companies of CSE.

Management skills and the quality of accounting information in Brazil

This study aims to analyze managerial skills in the practice of earnings management via earnings smoothing and accruals in B3 companies. To this end, a quantitative and descriptive study was conducted using data from the Economática database, with a sample of 966 observations from 2010 to 2020. Demerjian et al.’s (2012) model was used to measure managerial skill. Its efficiency parameters are the manager’s characteristics in using resources to generate revenue. The models by Leuz et al. (2003) and McNichols (2002) were used to measure smoothing and levels of earnings management. The results showed that, on average, more skillful managers tend to smooth and manage earnings at higher levels than less skilled managers, indicating that in Brazil, on average, more skillful managers reduce the quality of Brazilian firms’ earnings. This paper contributes to the literature and fills a gap regarding managerial skills and the impact on the results of Brazilian companies. It shows that, in Brazil, managerial skill is associated with smoothing and earnings management practices and sheds light on interested parties regarding the influence of the profile of managers and their ability to influence the numbers released in the Brazilian market.

AGRESIVITAS PAJAK DAN MANAJEMEN LABA PADA SAAT PERUBAHAN TARIF PAJAK PENGHASILAN BADAN

This study aims to see whether there are differences in the level of tax aggressiveness and earnings management after the enactment of Law No. 2 of 2020. Tax aggressiveness is measured by current ETR and earnings management is measured by the Modified Jones Model. The location of this research was conducted at the Indonesia Stock Exchange. Companies listed on the LQ-45 index are the sample in this study. The analytical technique used is the Wilcoxon statistical test. The results showed that there are differences in tax aggressiveness before and after tax rate changes for corporate taxpayers based on Law No. 2 of 2020. Unlike the result of tax aggressiveness, there is no significant difference in the application of earnings management before and after tax rate changes for corporate taxpayers based on Law No. 2 of 2020.

Board Member Remuneration and Earnings Management: The Case of Portugal

This study draws on agency theory and evaluates the effect of the remuneration structures of board members on earnings management, proxied by discretionary accruals. To achieve the objective, this study uses a multiple regression model and a hand-collected dataset of Portuguese-listed firms from 2015 to 2019. This study suggests that fixed board remuneration is associated with lower levels of earnings management, as opposed to variable remuneration of board members, which is strongly associated with a higher level of earnings management. The findings based on this study provide useful information to investors and regulators in evaluating the effect of board compensation structure on earnings management. Additionally, this study expands the corporate governance literature by examining an under-researched mechanism to address the agency problem.

The Extent of the Effect of Disclosing Research and Development Activities on Earnings Management

The research aims to identify voluntary disclosure of research and development (R&D) activities and the extent of its effect on earnings management. To achieve this goal, quantitative methods were used. In collecting data, the researchers depend on the financial statements published on the Iraqi Securities Commission website for a sample of companies, amounting to (4) samples, for the period (2013-2022). Voluntary disclosure of research and development activities was measured by research and development costs divided by sales. Earnings management is measured by Miller's model. The most important results reached are that there is a very low level of disclosure of research and development activities in companies (research sample). It is also noted that there is a large discrepancy in the levels of disclosure between companies and across the years (research sample), meaning that there are high levels in some observations, while there are low levels in other observations within a wide gap between the two levels. Also, it is noted that there are very high levels of earnings management according to Miller's model in companies (the research sample), and this level of earnings management varies from one company to another and from one observation to another, with great variation between those observations. It was also found that there is a positive relationship between the disclosure of research and development activities and earnings management, meaning that an increase in the level of disclosure of research and development activities will be accompanied by an increase in the level of earnings management practices in companies (research sample).

PENGARUH FREE CASH FLOW DAN FAKTOR-FAKTOR LAINNYA TERHADAP EARNINGS MANAGEMENT

The purpose of this study is to obtain empirical evidence regarding the effect of free cash flow, profitability, institutional ownership, leverage, board of commissioners, sales growth, and firm size on earnings management. This study used 74 manufacturing companies listed on the Indonesia Stock Exchange during period 2019 - 2021 as samples with a total sample data is 222 data. The sample selection process uses the purposive sampling method and uses the multiple regression method in testing hypotheses. The empirical evidence obtained regarding the results of this study shows that free cash flow, profitability, and leverage have an influence on earnings management. If the free cash flow, profitability, and leverage owned in a company are high, the level of earnings management is also high. In this study, the institutional ownership, board of commissioners, leverage and firm size had no influence on earnings management.

Regulatory investigations, media coverage, and audit opinions

After an investigation of an audit engagement is announced, does media coverage of the investigation affect the involved individual auditor’s behaviors in his or her other non-investigated engagements? We examine this question using a sample of Chinese firms. We find that an individual auditor is more likely to issue modified audit opinions in non-investigated engagements if the investigation attracts a high level of media coverage. This augmenting effect of media coverage exists only when the non-investigated firm has an opaque information environment or a relatively high level of earnings management, when the individual auditor is the review auditor or a non-busy auditor, and when the news comes from an opinion leader. Our results suggest that the media can play an effective role in broadening the sphere of influence of regulatory actions.

INFLUÊNCIA DA CULTURA DOS PAÍSES NO MONITORAMENTO EXERCIDO PELA AUDITORIA EXTERNA

ABSTRACT This paper verifies whether and how the country’s cultural dimensions moderate the relationship between the quality of the audit firm and the level of earnings management. The sample is formed by 88,428 observations from 18,842 companies in 23 countries, covering the period from 2011 to 2018 in an unbalanced panel. The dimensions of national culture were based on the GLOBE project, and the level of earnings management was estimated by Dechow et al. (1995). The results show that national culture influences the monitoring of the largest auditing firms and benefits companies in preparing financial statements. Such results suggest a relationship of audit bias due to cultural aspects, which may compromise the quality of accounting information.