Earnings Management Practices Research Articles

An Empirical Investigation on Ownership Structure and Earnings management: Evidence from PSX and FTSE-350 Listed Firms

The current research aims to highlight the impact of ownership structure on real earnings management by comparing the firms listed on Pakistan Stock Exchange and London Stock Exchange. The secondary data of 167 Pakistani and 233 UK listed firms is analysed from 2011-2019. The results obtained for both countries shows that ownership structure influences the real earnings management. The results also suggest that real earnings management practices are significantly different in big and small size firms. Further, the impact of ownership structure on real earnings management among the big and small sized firms is different. The results of the study are helpful to the policymakers in reducing the real earnings management. The limitations and future aspects are also elucidated comprehensively.

Pengujian Manajemen Risiko Sebagai Variabel Moderasi Terhadap Hubungan Manajemen Laba dan Nilai Perusahaan

This study aims to examine the relationship between earnings management practices and firm value with enterprise risk management as a moderating variable. The sample in this research is 50 manufacturing companies listed on the Indonesia Stock Exchange during 2017-2021. The data collection technique was purposive sampling and derived from secondary data, both from the IDX and from the website of each company. The research hypothesis was tested using regression analysis. The results of the study show that earnings management has a significant negative effect on firm value. Risk management, which is expected to weaken the relationship between earnings management and firm value, is not supported in this study. Although risk management has not been significantly proven, this research contributes to stakeholders to encourage managers to maximize and optimize company risk management practices as an effort to prevent earnings management practices.

Trends in Earning Management (EM) Practices: A Cross Country and Industrial Analysis

This paper analyzes the trends in earnings management (EM) practices of 500 non-financial firms across 8 major industries operating in both developing and developed economies for the period 2008-2017. It significantly contributes to the literature by identifying the country-specific, industry-specific, and over the time trends in accrual and real earnings management practices prevailing in the non-financial sector of both developed and developing economies of the world. EM trends are analyzed across countries, across industries, and over the sample period. The sample consists of 500 non-financial firms from 8 different industries of 22 developed and developing economies for the period 2007-2018. Accrual and real earnings management are alternatively used in the non-financial sector across the world. This study uses the Modified Jones Model (Dechow et al., 1996) and the Roychowdhury model (2006) to estimate accrual and real earnings management. The analysis of variance (ANOVA) is used to examine the mean differences between countries and industries as well as over the time differences. The country-wise analysis concludes that Pakistan is on the top of the list in managing earnings followed by Canada, particularly in accrual-based earnings management. It may be attributed to poor accounting standards and regulatory frameworks. The industry-wise analysis shows that the mining industry, characterized by high dependency on capital markets and the uncertainty associated with the prospects of mineral reserves, is highly involved in EM. Finally, the year-wise analysis determines that the year 2009 was highly escorted with accrual and real earnings management practices, which may be the result of the global financial crisis of 2007-2008. The findings imply that the policymakers of developing economies should strongly emphasize improving the general macroeconomic environment of the economy by controlling inflation, improving law and order conditions, and ensuring political stability. Additionally, the findings have potential implications for corporate managers while formulating strategies to restrict them from EM that may diminish both firm value and the economy.

Corporate governance, external financing, and earnings management: new evidence from an emerging market

This study investigates the relationship between corporate governance, external financing, and earnings management in an emerging market. Using a sample of Vietnamese listed companies in the period of 2010–2020, the results indicate that corporate governance, which is measured by a principal component analysis (PCA) methodology, is a useful mechanism to control earnings management. However, when firms engage in external financing activities, corporate governance is not significantly associated with both accrual-based and real earnings management. In addition, the study also examines the role of corporate governance in moderating the effects of earnings management on firm value, and how it is encouraged by external financing needs. The study shows that while good corporate governance lessens the influence of earnings management on firm value, external financing needs only prompts earnings manipulation and have no effect on firm value, directly or indirectly. Therefore, the findings could provide implications for managers and regulators to enhance governance practice to alleviate firm devaluation caused by earnings management practice.

Whether corporate social responsibility is used to suppress earnings management practices and could corporate governance mechanisms prevent them? An empirical study

PurposeThis study examines whether managers adopt corporate social responsibility (CSR) disclosures to suppress earnings management practices and whether corporate governance mechanisms could limit such practices.Design/methodology/approachA quantitative approach was followed, in which secondary data from listed firms from 2014 to 2019 were gathered. Descriptive statistics and inferential techniques were performed, which included correlation, ordered logistic regression and 2SLS panel regression analyses.FindingsThe findings indicate that firms use CSR disclosure to conceal managers' opportunistic behaviour via earnings management as an entrenchment strategy and that corporate governance mechanisms could significantly constrain such behaviour.Research limitations/implicationsThis study goes beyond the conventional agency theory by incorporating additional theoretical perspectives from stakeholder and legitimacy theories, resulting in a multi-theoretical perspective in conceptualizing the study.Practical implicationsThe findings are expected to have significant policy implications, especially in limiting the opportunistic use of CSR disclosures and reducing earnings management practices to safeguard stakeholders' interests and ensure the sustainability of business entities.Originality/valueThe levels of CSR and board governance practices are captured using comprehensive indices. Moreover, earnings management was operationalized using both accrual-based and real earnings management proxies. Furthermore, while addressing an empirical dearth noted, the findings provide significant policy implications for limiting managers' opportunistic and unethical use of CSR disclosures with corporate governance mechanisms.

To what extent does share ownership affect informative earnings management? Evidence from Indonesian manufacturing sector

Inconsistent findings regarding the relationship between share ownership and earnings management, specifically in terms of informative and opportunistic practices, have been observed in previous studies. To address this gap, the present research aims to investigate the impact of institutional, governmental, and family ownership on informative earnings management. The sample comprises 615 manufacturing firm-year observations listed on the Indonesian Stock Exchange. Earnings management is assessed by examining discretionary accruals, which are further categorized into informative and opportunistic acts based on earnings growth. Logistic regression analysis is employed to analyze the data. The results indicate that both institutional and family ownership have a positive effect on informative earnings management. This suggests that institutional and family shareholders play influential roles in monitoring managerial behavior, particularly in encouraging informative earnings management practices rather than opportunistic ones. Conversely, governmental ownership does not have a significant effect on earnings management. This finding suggests that government shareholders may have lesser interest in evaluating managerial performance based on earnings and instead prioritize political and social considerations. Overall, this study contributes to the existing literature by shedding light on the distinct influences of different types of share ownership on earnings management practices, particularly in terms of their impact on informative earnings management.

Bank diversification and earnings management: the moderating effect of female directors

PurposeThis paper aims to investigate the effect of banking activities diversification on earnings management practices and the effect of female directors on this relationship.Design/methodology/approachBased on a sample of 122 banks operating in Middle East and North African countries from 2006 to 2018, we use dynamic panel model estimated with generalized method of moments approach to deal with endogeneity issues surrounding the diversification decision.FindingsThe results show that diversification increases earnings management and that the presence of female directors on board moderates this relationship. In particular, female managers tend to reduce earnings management practices in diversified banks. Further, diversified conventional banks appear to be more impacted on the earnings management practices than on Islamic banks.Originality/valueThe study extends previous research by investigating the relationship between earnings management and diversification of banking activities in emerging countries where earnings management cannot be easily detected and diversification strategy is widely used. It, also, explains this relationship via the moderating effect of female directors as a banks’ internal governance mechanism.

Investigating earnings management practices and the role of the board and committees in emerging markets: Evidence from Malaysian public companies

AbstractThis study was aims to examine the significant elements of the audit and board committee in predicting earnings management (EM) for the period of 2010–2021. The study population comprised total number of 775 listed firms on Bursa Malaysia's main market. The annual audited financial statements and reports of the listed firms, firm's websites, Bloomberg and the Bursa Malaysia website were used as method of data collection. The analytical method used in the current study was descriptive statistic and GLS methods of panel regression. The findings of this study suggested that firms with effective CG mechanisms such as, audit committee size (AUDSIZ), audit committee financial expertise (AUDFEXPT), remuneration and nomination committee (R&NC), supervisory board size (SBS), mitigates accrual, and REM. However, the findings also indicated that gender composition (CGEND) were found to be ineffective in predicting EM.

Do family ownership and control influence the consequences of IFRS adoption?

AbstractResearch Question/IssueThis study investigates whether the impact of the mandatory adoption of the International Financial Reporting Standards (IFRS) on earnings management practices varies between family and non‐family firms. Specifically, we examine the effects of different family ownership configurations and the CEO family identity.Research Findings/InsightsWe find that firms in Taiwan use less accrual‐based earnings management (ABEM) under the IFRS but more real earnings management (REM). On average, IFRS adoption is less likely to result in upward ABEM and REM in family firms than in non‐family firms. However, family firms with greater family ownership, lower family cash–vote divergence, a founder CEO, or a professional CEO are more likely to promote the positive effect of the IFRS on ABEM and mitigate the negative effect of the IFRS on REM. Furthermore, these firms are less likely to substitute ABEM with REM after the transition to the IFRS.Theoretical/Academic ImplicationsWhile recent literature has paid increasing attention to various governance characteristics that shape management's reporting incentives and, thus, affect the consequences of mandatory IFRS adoption, we focus on family firms in which the principal–principal agency relationship between controlling owners and other shareholders is salient. We highlight the effect of family owners' different agency features in relation to a structural change in the accounting regime.Practitioner/Policy ImplicationsThis study addresses how a firm's corporate governance influences the net benefits of implementing new accounting standards. Our evidence offers insights to policymakers and capital market participants, showing that variations in family owners' reporting incentives may have different impacts on the consequences of adopting the IFRS.

DEBT RATIO, RETURN ON ASSET, FIRM SIZE AND EARNINGS MANAGEMENT: AGE MODERATION

Earnings management still become a phenomenon both in Indonesia and abroad. Many cases of earnings management practices have occurred and the company's amount of leverage is one of the drivers of earnings management practices. This research aims to examine and describe the relationship between various debt policy, profitability, and company size on earning management moderated by firm age. The selected samples were 102 companies listed on the Indonesia Stock Exchange (IDX) in 2010-2018. The independent variables in this study include DER, bank debt, short-term debt and long-term debt, age, and company size. Earnings management as the dependent variable in this study uses the Modified Jones Model. The results of the regression equation analysis show that all debt policy proxies consistently have a negative and significant effect on earnings management. Furthermore, the company's experience as a proxy for firm age strengthens the relationship between debt policy and earnings management practices. More interestingly, specifically among the three debt policies, bank debt is the policy that is most able to represent the influence on earnings management practices. This indicates that the most effective monitoring of earnings management practices comes from banking institutions. Overall, the profit information shown in financial statements is the product of earnings management, so the level of quality of financial reports is deserving of close inspection and prudence when making decisions based simply on profit information.

Sustainability Reporting and Earnings Management of Listed Non-Financial Firms in Nigeria

Abstract The effects of sustainability reporting on earnings management was examined in the study extensively. Causal research design was employed in this study. The study population comprises of all the 112 quoted non-financial firms in Nigeria, sample size is 22 listed manufacturing firms purposively selected for the purpose of this study. The study covered 7 years’ period ranging from 2015-2021. The data used for this study were gotten from the annual reports and sustainability reports of the selected firms. Data used for this study were analyzed with the use of descriptive statistics and panel regression analysis. Sustainability reporting was measured in this study by using the social, economic and environmental disclosures index, whereas earnings management was measured using discretionary accrual and real earning. The outcome of the analysis of the study revealed that sustainability reporting has a significant negative effect on discretionary accruals and real earnings evidenced by t-statistics = (-2.31, -2.54, -2.95) and p-values of (0.037, 0.018 and 0.023) respectively for social, environmental and economic report disclosures on discretionary accruals and t-statistics of = (-2.53, -2.23, -2.86) and p-values of (0.012, 0.029 and 0.005) respectively for social, environmental and economic report disclosures on real earnings. The study concludes that the firms with low sustainability disclosure will probably be more involved in earnings management practices than the firms who actively disclosed their sustainability matters in details. The study recommends that firms should ensure they disclose in details the true state of their sustainability activities.

Nexus between corporate governance and earnings management in family and non-family firms

This study explores the relationship between internal corporate governance mechanism and accruals and real earnings management (EM), following Pakistan’s 2012 amended Code of Corporate Governance. It also examines the moderating role of family firms on the relationship among corporate governance mechanisms and accruals and real earnings management. For this purpose, we used a sample of 172 firms listed on the Pakistan Stock Exchange (PSX) for 2012–2019. The dependent variables were estimated by utilizing the generalized method of moments (GMM), fixed random effects and moderation analysis were estimated through Stata. Hausman specification test was used to choose among random and fixed effects. Results report that board size showed a significant positive impact on abnormal discretionary expenses and overall real earnings management. Board independence led to a substantial and negative impact with accruals EM. Managers of familyowned firms are also opportunistically altering the reported earnings. Results illustrate to the users of financial statements that the reliability of financial information depends on the effectiveness of corporate governance. Also, highlight the efficiency of monitory mechanisms and suggest that board independence is one of the practical approaches for an emerging market to restrain the EM practices. Findings are helpful for regulators, policymakers, and investors to regulate and make policies to improve the financial reporting quality in Pakistan. As per the authors’ knowledge, this study adds the novelty by focusing on two critical internal monitoring mechanisms (board independence and board size) in mitigating earnings management, following the 2012 amended Code of Corporate Governance in Pakistan. It will add uniqueness by studying the moderating role of family ownership, as the literature is scarce. The findings of this study highlighted the impact of the internal monitoring mechanisms on earning management practices in Pakistan.

The Influence of Audit Quality in Controlling Practice Earnings Management

The Influence of Audit Quality in Controlling Practice Earnings Management

Do CEO duality and expertise affect earnings management behavior? The moderating effect of family ownership

PurposeThis study aims to analyze whether chief executive officer (CEO) duality and financial expertise are associated with earnings management to exceed thresholds. It also investigates to what extent and in what direction this association evolves when family ownership is introduced as a moderator variable.Design/methodology/approachBased on balanced panel data related to companies listed on the Tunis Stock Exchange, this study uses the logistic random-effect model to test research hypotheses during the period spanning from 2016 to 2021.FindingsThe results show that CEOs with financial expertise are less inclined to engage in earnings management to avoid reporting losses and earnings decline. The authors also provide evidence that CEO duality allows top management to be more powerful and, therefore, manage earnings to report positive profits and sustain recent performance. Furthermore, the authors find that family ownership moderates the association between CEO financial expertise, CEO duality and earnings management to exceed thresholds.Practical implicationsThe findings suggest to regulators involved in corporate governance and earnings management issues a reflection on CEO duality power, board effectiveness and family control. The study results are also of interest to auditors and board members as they provide a more in-depth understanding of the impact of CEOs' attributes and family control on financial reporting decisions.Originality/valueThis study extends past literature by providing new insights into the effect of CEO attributes and family control on earnings management practices in weak investor protection countries such as Tunisia.

Managing government commissioning and philanthropic expectations: earnings management in Australian nonprofit disability service providers

PurposeThe purpose of this study is to investigate the prevalence of earnings management in the Australian not-for-profit (NFP) disability service providers sector, as well as to understand the motivations for and implications of such practices. This research is important for stakeholders, such as members and funders, as well as the broader Australian community, considering the significant financial resources allocated to these organizations from the public purse.Design/methodology/approachThe authors employ a longitudinal dataset containing financial data from 154 Australian NFP disability service providers, collected over a two-year period (2015–2016). Through the analysis of detailed balance sheets and income statements, the authors seek to uncover evidence of earnings management practices in this sector. The study’s results provide valuable insights into the behaviour of the charitable human services sector.FindingsThe findings reveal that Australian NFP disability service providers engage in earnings management practices, primarily aimed at reducing reported profits to meet the normative financial expectations of stakeholders, such as public sector funders and philanthropists. The executives of these organizations strive to report profits close to zero, being cautious not to report a loss, which might raise concerns about their sustainability.Originality/valueThe authors contribute to the existing literature on earnings management in the NFP sector by focussing on Australian disability service providers, an area that has been under-researched due to a lack of suitable data. The results offer insights into the incentives and implications of earnings management practices in this sector and highlight the need for a revaluation of accounting standards, reporting requirements and audit arrangements applicable to the NFP sector.

The Effect of the Covid-19 Pandemic on Stock Returns with Moderating Variables of Cash Holding and Earnings Management

This study aims to determine the impact of the COVID-19 pandemic in Indonesia on company cash holdings, earnings management practices, and stock returns. To overcome this, a parameter estimation method can be used by adding weight to each parameter, namely the Generalized Least Square (GLS) method. The results showed that the covid-19 pandemic had a significant negative impact on the company's cash holding as a consequence of the company's decreased ability to generate profits. The value of P>|z| shows the number 0.109 which means that the variable has no significant effect. The results of the hypothesis test show that cash holding significant effect on earnings management. At the same time, the company's long-term stock returns are not significantly affected by the COVID-19 pandemic. Earning management practices are also not proven to significantly affect stock returns.

Penerapan Kaidah Fiqh Manajemen Laba Pada Lembaga Keuangan Syariah Dalam Perspektif Islam

The purpose of this study is to determine the application of fiqh related to earnings management in Islamic financial institutions. The method used in this research is a qualitative method. The presence of fiqh rules is needed to solve problems in a broad scope, even in Islamic financial institutions, especially in earnings management. Either in its application or regarding rules that are restrictive in lawful or not prohibited implementation. Usually in Islamic financial institutions, mudharabah and musyarakah are contracts that are commonly used for transactions in Islamic banks. The application of fiqh principles in earnings management is proven to be significantly applied, through its application which must comply with Islamic ethical provisions and be based on the Islamic spirit. In the practice of earnings management, all parties must behave according to sharia provisions or according to sharia principles.

Defining Earnings Management Practices in Light of the Adoption of International Financial Reporting Standards

Purpose: The purpose of research is to study the impact of IFRS standards on the implementation of international financial instruments in the financial institutions of the country before and after implementing IFRS rules on the application of the IFRSs.Method: guarantees the practices of the educational institutions from 2010 to 2021, and measures them by means of references. (Kothari et al., 2005).Results: Statement of the International Standards for Financial Reporting, which shows that the international standards for financial reporting contain a number of alternatives that allow for Earnings Management (EM) practices.Research Implications: We also find that the level of application of IFRS in non-commercial markets may differ in importance from the application in the Non-Commercial Markets.Originality/value: contribute to the challenges facing IFRS, which can help to implement IFRS successfully in the future in order to avoid problems with the implementation of the standards by improving the quality of the management of the options available in these standards.

The Influence of Managerial Ownership, Institutional Ownership and Deferred Tax Burden on Earnings Management in Food and Beverage Companies on the Indonesia Stock Exchange 2017 – 2021

This study aims to analyze the Effect of Managerial Ownership, Institutional Ownership and Deferred Tax Burden on Profit Management in Food and Beverage Companies on the Indonesia Stock Exchange 2017 – 2021. This study used a quantitative approach in the form of financial statements of food and beverage companies listed on the Indonesia Stock Exchange from 2017 to 2021. The sampling technique used in this study used a purposive sampling approach, the number of samples used in this study were 90 samples. The results of this study indicate that managerial ownership has no effect on earnings management, institutional ownership has an effect on earnings management, deferred tax expense has an effect on earnings management, simultaneously the variables managerial ownership, institutional ownership and deferred tax expense have an effect on earnings management. The limitations in this study are that the research object only focuses on food and beverage sector companies that are listed on the Indonesia Stock Exchange from 2017 to 2021. This study uses the dependent variable, namely earnings management and independent variables, namely Managerial Ownership, Institutional Ownership and Deferred Tax Expenses As material for consideration in making decisions related to earnings management and can be used as a reference for companies in determining policies related to financial reports regarding earnings management practices. This Paper is Original Research paper.

The right time for a big bath: asset impairment recognition in earnings management

PurposeThe article investigates the patterns of asset impairment recognition in search of signs of “big bath” earnings management practices across an internationally diversified sample of public companies. It also elucidates the incentives that may underlie such practices and explores possible safeguards embedded in the existing corporate governance mechanisms.Design/methodology/approachThe article applied static panel and binary logit models to an international firm-level panel dataset of 1045 public companies observed between 2003 and 2018.FindingsOur empirical results suggest that recognition of asset impairment has no determinate impact on earnings volatility. Investigating the possibility of “big bath” earnings management practices, the authors found no impact of asset impairment recognition on total senior executive compensation in firms, which pay performance-based remuneration. The quality of corporate governance has appeared to impact the firms’ intertemporal proclivity to recognize asset impairment with those having the more entrenched and management-controlled boards being more likely to time impairment recognition by delaying it during exceptionally good and exceptionally bad years. While generally unlikely, recognition of asset impairment in a period with a recorded negative operating performance is found to be closely associated with key executive departures.Originality/valueThe article corroborates the salient role of corporate governance mechanisms in shaping the intertemporal patterns of asset impairment recognition. The possible remedies to the phenomenon should be derived therefrom.