Earnings Management Motivation Research Articles

Exploring Financial Motives for Earnings Management in the Economic Crisis. Evidence from Greek and German Listed Companies

The study examines the impact of economic crisis and focuses on the reasons for cases of earnings management. More specifically, it analyses whether executive compensation, analysts’ forecasts and violation of debt covenants are important motives for accounting fraud. It also examines whether voluntary disclosure of financial information could improve the quality of financial information or confuse investors. The paper examines listed companies in the Greek and German stock markets from 2007 to 2009 to find out how these two economies reacted after the introduction of IFRS. Thus, it would be interesting to find out whether Germany, a strong EU economy, was able to eliminate earnings management motives, as most would predict, while also examining whether Greece, a weak economy, was able to achieve similar results. The results of the study provide useful insights as they confirm that companies that provide additional accounting disclosures perform better in both countries. However, the remaining results suggest that credit covenant violations, executive compensation and bonuses, and analyst forecasts remain strong motivators for earnings management in both countries studied. In this order, it seems that IFRS need to introduce and maintain improved mechanisms to overcome such phenomena.

Sentiments, COVID-19, and the motivations for pro-forma earnings management in South Africa

Sentiments, COVID-19, and the motivations for pro-forma earnings management in South Africa

Can enterprise ESG practices ease their financing constraints? Evidence from Chinese listed companies

Under the guidance of the United Nations SDGs target framework, enterprises' ESG practices of developed countries can effectively promote external investors' ESG investment, thus easing enterprises' financing constraints. Using the data of Chinese A-share listed companies in the Shanghai- and Shenzhen-stock exchange markets from 2013 to 2022, this study explores the causal relationship between enterprises' ESG practices and their financing constraints to provide Chinese experience, examines the mediating effect with corporate transparency and investor sentiment, and analyzes the heterogeneity with external auditor type and earnings management motivation. It is found that enterprise ESG practices can enhance their financing ability by improving corporate transparency and suppressing investor sentiment; for the non-Big 4 audit listed companies and the listed companies with the weak motivation of earnings management, the corporate ESG practice has a more significant effect on their financing ability. This study enriches the research on the relationship between ESG practice and ESG financing by providing Chinese evidence.

Heterogeneous risk disclosure and earnings management motivation: evidence from China’s IPO market

PurposeHeterogeneous risk disclosure has been proven to improve the efficiency of new stock issuance, but excessive risk disclosure during the IPO may lead to irrational underestimation of the company, which is different from the original intention of management's detailed disclosure. Therefore, this study aims to examine the impact of IPO heterogeneous risk disclosure on earnings management motivations from the information transfer perspective of earnings management.Design/methodology/approachThe sample includes 2,000 listed companies listed firms on Shanghai and Shenzhen Stock Exchanges from 2007 to 2022. This study uses the pretrained ERNIE model to measure text similarity in the prospectus to measure the heterogeneity of IPO risk disclosure.FindingsThis study empirically finds that heterogeneous IPO risk disclosure suppresses the opportunistic motivation of earnings management because managers tend to use earnings management to leverage information transmission functions. Such an effect is more pronounced in firms with higher analyst attention, lower marketization levels and non-state-owned. And heterogeneous risk disclosure may inhibit management’s over-investment behavior, thereby reducing the possibility of management engaging in opportunistic earnings management. Besides, price discounts are used to distinguish opportunistic and non-opportunistic earnings management and carry out a quasi-natural experimental design to demonstrate that marketization can enhance the relationship between heterogeneous risk disclosure and earnings management.Originality/valueThis study contributes evidence regarding the economic consequences of managerial earnings management behavior related to heterogeneous IPO risk disclosure. It supports highlighted firms in the IPO risk information disclosure to mitigate potential adverse outcomes through earnings management. This contributes to the literature and enhances information transparency in the capital market, fostering the healthy development of China’s capital market.

Mayor re-election and earnings management: evidence from Portuguese municipalities

PurposeThe aim of this paper is to investigate whether Mayors in Portugal engage in earnings management close to zero with the motivation of re-election.Design/methodology/approachThe data used in this study were annual financial information from Portuguese municipalities from 2005 to 2016, as well as data on elections and Mayor re-elections involving three political cycles. The methodologies employed were quantitative, including graphical and panel data regressions.FindingsThe results indicate that municipalities used discretionary accruals to engage in earnings management to report net earnings close to zero, and re-election seems to be a motivation for earnings management behaviour. Furthermore, the results suggest that municipalities in which the Mayor is re-elected are less likely to report positive net earnings close to zero.Originality/valueThis paper makes a valuable contribution to the literature on earnings management in municipalities. At the theoretical level, it makes it possible to identify whether re-election is a motivation for earnings management and, in this sense, to identify patterns of behaviour by managers. On a practical level, the knowledge of a manager's behaviour patterns will help to anticipate his or her future behaviour and, consequently, may prevent inefficiencies.

ESG performance and stock idiosyncratic volatility

Focusing on ESG-responsible investment, this paper identifies the causal effect of ESG performance on stock idiosyncratic volatility in a typical emerging market, China. Based on the data of A-share listed firms from 2012 to 2022, we find that the ESG performance of listed companies significantly reduces stock idiosyncratic volatility, suggesting that ESG investment can provide a more transparent information environment for the market, thereby reducing firm idiosyncratic risk. Mechanism analysis found that ESG performance relies on mechanisms that inhibit management's earnings management motives and increase analyst attention to the impact of stock idiosyncratic volatility of listed companies.

An Empirical Analysis of Corporate Governance and Earnings Management Motives Influencing Goodwill Impairment in Chinese Manufacturing Firms

Goodwill impairment, resulting from the impairment tests conducted on goodwill generated during business mergers, serves as an effective indicator of a company's true and reliable goodwill value, as well as its operational and financial conditions. This study investigates the impact of earnings management motivations on goodwill impairment from the perspective of corporate governance, focusing on Chinese manufacturing listed companies between 2016 and 2020. Utilizing regression analysis and panel data models, the study examines the internal governance mechanisms, including the combined shareholding ratio of the top ten shareholders, and the external governance mechanisms, such as the role of the four major auditing firms. The findings reveal that both "big bath" and earnings smoothing motives can influence companies' decisions to recognize goodwill impairment, while effective internal and external governance mechanisms can help mitigate earnings management motivations. Further analysis shows that non-state-owned manufacturing listed companies are more likely to exhibit goodwill impairment behaviors driven by earnings management motives. These findings provide valuable insights for listed companies seeking to improve their corporate governance structures and for Chinese capital market regulators aiming to enhance relevant regulatory policies and refine goodwill measurement standards.

Debt as a motivation for earnings management by Portuguese municipalities?

IMPACT This article focuses on earnings management in local government. Specifically, it examines whether politicians in Portuguese municipalities engage in earnings management due to indebtedness. The findings are critical for citizens/voters, as it enables them to evaluate potential inefficiencies in the management of public resources. The author recommends that standard setters make improvements in accounting standards to minimize the opportunity for accounting discretion at the local level.

Can Inquiry Letters Make R&D Information Pricing More Effective? Evidence from China

ABSTRACT There are information transfer motives and earnings management motives for the disclosure of R&D expense information. These two motives contradict each other, which can cause distortion of corporate R&D expense information and lead to mispricing of R&D information. In this paper, we investigate the market reaction to R&D expense inquiry letters (hereafter, RDILs) and their impact mechanism from the perspective of correcting R&D information mispricing by using Chinese A-share listed companies from 2015 to 2019. We find that RDILs have a significantly negative market reaction, suggesting that they have additional information content. Mechanism analyses indicate that this information content is affected by the inquiry letter characteristics and the R&D characteristics of the inquired firm. The findings of this paper have implications for how developing countries can use capital markets to stimulate corporate innovation, and for the establishment of proactive inquiry mechanisms to address the mispricing of innovation information. Exchanges in other countries should consider their use.

Managerial ability and informative earnings management: the role of CEO-commissioner relationship and board independence

Purpose The purpose of this study is to examine the effect of managerial ability on informative earnings management (hereafter IEM) and to examine the moderating role of the chief executive officer and board of commissioner relationship (hereafter CEO-commissioner relationship) and board independence between managerial ability and IEM. Design/methodology/approach Sample consists of 864 firm-years listed on the Indonesian Stock Exchange. Informative earnings management is measured by the relationship between discretionary accruals and earnings growth. Managerial ability is measured by data envelopment analysis. This research uses firm-effect logistic regression to perform the data analysis. Findings Based on firm-effect logistic regression, managerial ability increases IEM. It confirms the managers’ stewardship behavior where managers tend to engage in IEM and provide higher quality information for shareholders. The result also shows that the absence of a CEO-commissioner relationship and higher board independence leads higher ability managers to engage more in IEM. It confirms the role of corporate governance to reduce managers-shareholders conflict (in the context of agency theory) or to facilitate higher ability managers to act as both controlling and minority shareholders’ stewards (in the context of stewardship theory) by engaging more in IEM and providing higher-quality information. Originality/value This research contributes to filling the previous studies gap that provides conflicting results on managerial ability and earnings management by considering earnings management motivations, CEO-commissioner relationship and board independence. This research also contributes to providing new evidence of managerial ability, IEM, CEO-commissioner relationship and board independence, especially in Indonesia.

An Empirical Analysis of the Impact of Environmental Protection Tax on Corporate Earnings Management

The environmental protection tax (EPT) is an important environmental regulation measure in China and an important guarantee for high-quality economic development. An important measure for the construction of ecological civilization is that local governments promote the construction and improvement of EPT in the way of “Fee-to-Tax.” The EPT regulates pollution control, protects and improves the environment through taxation, and forms an effective mechanism for polluters to promote ecological civilization. This study made use of the data collected from different listed companies in Shanghai and Shenzhen provinces from 2010 to 2019, discussing the impacts of EPT on enterprise earnings management. An enterprise analysis model based on IoT-edge computing is suggested to decrease the processing time. The results of the empirical analysis completed in this study showed a significant positive correlation between EPT and enterprise earnings management. In other words, EPT increases the motivation of enterprise earnings management. Moreover, there is heterogeneity in the driving force of EPT on enterprise earnings management. For example, we observed that state-owned enterprises are significantly higher than non-state-owned enterprises. Moreover, pollution-intensive enterprises are significantly higher than non-pollution-intensive enterprises, and economically developed areas are significantly better than economically underdeveloped areas. In order to give better play to the effectiveness of EPT in modern environmental governance, the government should continue to improve the construction of EPT and speed up the construction process of ecological civilization in the republic of China.

The effect of earnings management on investment efficiency moderated by ceo remuneration

The purpose of this research is to analysis the effect of earnings management on investment efficiency, and also included remuneration CEO as moderating variable. The object of this study is manufacturing company listed on Indonesia Stock Exchanges from 2017 to 2020. The research data are processed through the statistical application of Statistical Product and Service Solutions (SPSS) 25 and Smart PLS (Partial Least Square) 3.2.9. The research results found that earnings management has no significant effect on investment efficiency. Moreover, research results also found that CEO remuneration can moderate the relationship between earnings management and investment efficiency. The findings of this study are beneficial for corporate governance in making investment decisions as well as protecting investors by reflecting the transparency of financial statements to avoid managerial opportunistic. A strong mechanism for management is important in preventing opportunism, due to certain earnings management motivations will be carried out in order to increase the amount of compensation incentives. The novelty of this research provides new insight into how CEO remuneration moderates the relationship between earnings management and investment efficiency.

Earnings management motives, idiosyncratic risk and corporate social responsibility in an emerging market

This research investigates the impact of the three earnings management methods according to Dechow and Skinner (2000) and Gunny (2005), i.e., accrual earnings management (AEM), real earnings management (REM), and fraudulent accounting (FRA), on idiosyncratic risk. This research also examines the moderating effect of corporate social responsibility (CSR) disclosure on these associations. This research employs balance panel data consisting of 492 observations from 2016 to 2019. This research obtains 123 companies listed under the manufacturing industry of the Indonesia Stock Exchange (IDX) through purposive sampling. To test the hypotheses, this research uses multiple linear regression models. This research finds that all three earnings management methods are positively associated with idiosyncratic risk. Furthermore, CSR disclosure is proven to weaken the effect of accrual earnings management and fraudulent accounting on idiosyncratic risk, but this does not apply to real earnings management. These results are robust after a sensitivity test. This research fills the existing gap within idiosyncratic risk study. Among similar studies, this research is the first to investigate the effect of fraudulent accounting on idiosyncratic risk and the moderating effect of CSR disclosure. This research also raises awareness of the cost of idiosyncratic risk, especially in emerging markets with relatively smaller stock markets, which makes diversification more challenging. It provides insights to market regulators on how investors can benefit from more disclosures

Financial Distress, Earnings Benchmark and Earnings Management Practices

Prior research exhibits contradictory evidence on earnings management practices, both accrual and real, undertaken by the firms in state of financial distress. This study uniquely examines the issue in the presence of earnings-increasing earnings management motivation- meeting earnings benchmark of avoiding losses. For examining the issue, this study analyzes large panel data of Indian public companies for the period 2000–2016. The findings indicate prevalence of earnings-decreasing real earnings management practices, that is, decrease in overproduction and increase in spending on discretionary expenses, in financially distressed firms despite there being motivation to increase earnings to avoid losses. No evidence of accrual earnings management practices has been observed in such firms.

Capital structure and earnings quality in microfinance institutions

PurposeThe purpose of this paper is to examine whether capital structure matters for earnings management of microfinance institutions.Design/methodology/approachThe empirical study is conducted using a sample of 575 MFIs over 2007 to 2015, we determined in the first step the discretionary part of provision for loan impairment. In the second step, we examine the effect of debt and donated equity on discretionary provision for loan impairment.FindingsWe found robust evidence that MFIs manage their earnings for external finance purposes. Debt exhibits a negative effect on earnings management for both profit and nonprofit MFIs. However, donated equity incites managers of MFIs to engage this practice in nonprofit MFIs.Practical implicationsFindings could be valuable to fund providers and investors who should consider accounting information quality in order to reach a better investment decision.Originality/valueThis paper is among the few to explore earnings management motivation of MFIs and to determine the role of external financing on earnings management practice.

Potential usage of Beneish's M-score under the conditions of selected segment of Slovak Economy

Research background: The motivation behind submitted article is the institutional research of earnings management. The aim is to identify the differences between the usage of creative accounting techniques in the form of Beneish’s M-score under the conditions of Slovak economy. The paper focuses on these differences and specifics and possible reasons behind them. Paper highlights also the impact of globalization on companies and therefore also behind their motives to use earnings management. It also offers several definitions of earnings management and also highlights the importance of the borderline knowledge between earnings management and fraudulent behavior. The Beneish’s model seems to be used by several of major Slovak companies in food segment. The aim was to analyse this sector of Slovak economy, because of its importance to everyday life of people. To assess the motivation behind its usage by these companies. Either it is because they want to transfer their earnings to maternal companies, or there are unexpected local circumstances. Purpose of the article: To describe specifics in the process of Beneish’s model usage under the conditions of selected segment of Slovak economy and also to highlight motivation behind its usage. Methods: The paper is built on the statistical methods, financial analysis as well as the methods of formal logic, like comparison, analysis or synthesis and deduction. Findings & Value added: Comprehensive overview of the earnings management definition, its forms and motives behind its usage and foremost specifics in its usage under the conditions of selected segments of Slovak economy.

Web Globalization and Its Possible Consequences on Usage of Different Creative Accounting Techniques

Research background: The paper is oriented on influence analysis of globalization on usage of different techniques of creative accounting and its development. The concept of creativity and accounting in together has logical background. Creativity is generally perceived as a positive thing. It is a certain creativity and originality created by the individual. Among these techniques, the paper deals with earnings management and what differs it from fraudulent behavior. The first part deals with definition of earnings management and comparison of different approaches. The second part outlines the major differences and boarders between earnings management and fraud from theoretical point of view with the usage of multiple views from different authors. Third part deals with different forms of earnings management. The last part discusses motives behind the usage of earnings management by managers and impact of globalization on this decision making. Purpose of the article: To describe motives behind earnings management usage and potential new directions of these motives under the conditions of continuous internalization and globalization. Methods: The paper is built on the methods of formal logic. The most important one for the purpose of this article is descriptive method. Among others, there are analysis, graphic method, comparison and synthesis. Findings & Value added: Comprehensive overview of the earnings management definition, its forms and motives behind its usage.

A Systematic Approach to the Motivations for Earnings Management: A Literature Review

Earnings management literature attempts to understand why managers manipulate earnings. Our paper presents a review of growing body of literature on motivations for the earnings manipulation. In consequence, our objective is to provide an ample classification of the reasons. A selection of leading papers was reviewed systematically from 1985 to early 2019 resulting in 383 articles. The results of the paper are important for both theoretical and empirical researches on the earnings management. For one side, we offer a theoretical discussion on the incentives and factors; on the other side, the paper aims to highlight recent progresses in the field. Screening, classifying and systematic review of earnings management literature do not only generate a structured overview of the work performed in this area during more than thirty years, but it also provides insights for further research. Our findings confirm that earnings management topic remains a fertile ground for academic research. Second, although there are many possible motives for managing earnings, the spotlight has been mainly on those incentives that are related to the stock market. Third, in terms of the factors and characteristics of the environment, the impact of institutional factors (investor protection, ownership concentration, legal enforcement) is especially accentuated by the authors. Finally, our research confirms that there are still many other opportunities to research. Therefore, in the last section we identify potential line of investigations.

Research and Development Investment and Earnings Quality Based on Regression Analysis

Based on the big data of Chinese listed manufacturing firms, we examine the relationship between research and development (R&D) investment and earnings quality. We construct a regression model and find that corporate R&D investment has a positive effect on earnings quality. R&D investment is useful to repress earnings management motives and thus improve earnings quality in listed manufacturing firms in China. And this positive correlation is more significant in state-owned firms than that in non-state-owned firms.

Earnings manipulation and firm performance: evidence from Jordan

This paper examines the link between earnings management and firm performance in Jordanian listed firms in the context of emerging markets. Panel data robust regression analysis of accruals and real earnings management was performed using modified Jones, Roychowdhury of abnormal cash flow, Roychowdhury of abnormal production, and Roychowdhury of abnormal discretionary expenses against firm performance proxies such as the returns on equity and assets, and earnings per share. Mixed results with detail to the abilities of the earnings management models estimated values. Modified Jones, Roychowdhury of abnormal cash flow and Roychowdhury of abnormal production positively related to all firm performance proxies (return on assets, return on equity and earnings per share). Roychowdhury of abnormal discretionary expenses has an insignificant relationship with all firm performance proxies. In addition, our findings offer new evidence about the consequences of earnings management (real and accruals) and three proxies of firm performance. Our results provide clear earnings management motivations that could be used in order to engage in earnings management in Jordanian listed firms.