Earnings Management Strategies Research Articles

Long-term Impact of Chinese Family Businesses on Earnings Management under the Sustainable Business Concept

This study aims to delve into the long-term impact of Chinese family businesses on earnings management under the framework of sustainable business practices. Considering the significant role of family businesses in the global economy, this paper focuses on the criticality of their earnings management strategies to economic stability. Employing an in-depth case study methodology, the paper analyzes several successful family businesses to explore the practical implications of sustainable business models on earnings management. The research reveals that integrating the concept of sustainable business into corporate culture and orienting towards long-term development can balance short-term gains with long-term sustainability, thereby fostering the robust growth of the enterprise. The conclusions of this paper emphasize the need for family businesses to concentrate on collective efforts in areas such as social responsibility, innovation upgrading, transparency, and effective communication to achieve long-term and stable development. This study provides practical guidelines for sustainable business strategies tailored for Chinese family businesses, aiming to create more favorable conditions and establish a solid foundation for future long-term development.

How does local debt expansion affect earnings management? Evidence from China

ABSTRACT This paper explores the impacts of local government debts (LGD) on earnings management strategy and moderation effects of internal control. Using a purpose-build database incorporating Chinese LGD and listed firms, we find that firms engage in income-increasing earnings management in response to local debt expansion. The results remain stable to endogeneity tests and various robustness checks. Furthermore, the impacts of LGD are markedly pronounced in non-SOEs, firms audited by Big 4 auditors, young and declining firms, and firms located in less-marketized regions. Moreover, this study reveals that internal control exerts moderation effects on the relation between LGD and earnings management.

Earnings Management and Tax Minimization: Comprehensive Analysis of Book-Tax Differences in Indonesia

The research aims to investigate the relationship between earnings management strategies, specifically Accrual Earnings Management (AEM) and Real Earnings Management (REM), and abnormal book-tax differences (ABTD). A quantitative approach was employed, utilizing multiple regression models, descriptive statistics, model testing, classical assumption testing, and hypothesis testing through Eviews 12 software on a sample of 671 observations from 61 companies listed on the IDX from 2011 to 2021. The results reveal a significant positive relationship between ABTD and both AEM and REM through overproduction. However, no significant relationship was found between REM and abnormal operating cash flow. Interestingly, a strong negative correlation was discovered between tax avoidance and earnings management through discretionary spending. These findings suggest that accrual management practices are associated with higher levels of tax avoidance, while discretionary spending for earnings management tends to decrease it. The implications of this study provide insights into potential earnings management techniques that can enhance corporate efforts to reduce tax payments and maximize profits while serving as a warning for potential tax avoidance activities.

The Earnings Management Strategy of Indebted Non-Listed Firms: The Case of Italy

Design/methodology/approach: For a sample of Italian non-listed firms that file full financial statements, we conduct a cross sectional regression analysis to determine whether the managers of indebted firms complement real activity-based (REM) with accrual-based (AEM) earnings management. To model each technique, we estimate OLS regressions with robust standard errors to avoid heteroscedasticity problems.Purpose: This research analyses whether the managers of highly indebted Italian non-listed firms, financed mainly by bank-loans, are likely to undertake real activity-based earnings management (REM) and accrual-based earnings management (AEM) as complementary activities to boost the impact of earnings management (EM) on reported earnings and achieve desired earnings targets.Findings: Consistent with the extant literature, we find that indebted firms are likely to complement REM with AEM to enhance their creditworthiness. We also provide evidence that high-quality audit companies constrain neither REM nor AEM initiatives. Finally, firms suffering from financial problems are less likely to engage in either initiative as they are under greater scrutiny from lenders.Originality: The paper investigates the complementary use of accrual-based and real activity-based earnings management techniques in non-listed firms, suffering from a high pressure from lenders in the case of indebtedness.Practical implications: This research should be of interest to banks, managers, and standard setters as it highlights the earnings management strategy employed by firms with a high leverage ratio and provides evidence on the relative costs associated with each earnings management technique.

Exploring earnings management: Institutional ownership and audit size in Malaysia’s sustainability pathway

This study aims to investigate the relationships between discretionary accrual earnings management (DEM), real earnings management (REM), institutional ownership, and audit quality in Malaysian firms. The study's findings are expected to offer insights into how these factors may influence Malaysia's progress towards the Sustainable Development Goals. We examine the relationship between DEM and REM to identify the potential simultaneous use of earnings management strategies. Additionally, we explore the impact of institutional ownership and audit firm size on a company's earnings management practices. Using data from the Kuala Lumpur Stock Exchange (KLSE) spanning 2016-2018 we conducted statistical analyses, including ANOVA, t-tests, and multiple regression. There were notable correlations between DEM and REM, suggesting that these earnings management techniques are being used concurrently. Notably, institutional ownership and audit firm size played substantial roles in firms' earnings management practices. Companies with higher institutional ownership and larger audit firms tended to exhibit lower levels of DEM and REM. However, these factors did not appear to moderate the DEM-REM relationship. These findings have critical implications for regulators and policymakers in addressing earnings management practices and enhancing corporate governance in Malaysia. Focusing on institutional ownership and audit firm size may help curtail such practices, contributing to Malaysia's progress towards the Sustainable Development Goals. Future research should explore other potential moderating variables and distinctive corporate governance features that could also impact the DEM-REM relationship.

Corporate earnings management strategy under environmental regulation: Evidence from China

In response to external adverse factors affecting corporate performance, managers may be motivated to engage in earnings manipulation. Environmental regulation as an institutional factor threatens normal earnings for heavy-polluting firms. This paper discusses corporate earnings management strategy under an environmental regulation policy. A multistage difference-in-differences (DID) estimation is performed, based on the central environmental protection inspection (CEPI) that is widely acknowledged as China's most stringent environmental policy. The results show that heavy-polluting firms significantly adjust their earnings management strategy after CEPI. Managers tend to adopt real activities manipulation with the effects of CEPI, while reducing their reliance on accrual-based earnings management. CEPI stimulates heavy-polluting firms to increase environmental investment, which makes their managers more likely to manage earnings through real activity manipulation, simultaneously resulting in the reduction of discretionary accruals. This earnings management strategy only appears in firms inspected in 2016 or non-state-owned enterprises or firms located in the regions with low environmental pressure. Our findings show that managers could use the chances provided by exogenous shocks to manipulate earnings.

Politically connected business and real earnings management: the moderating role of family control and audit quality

PurposeThis study examines whether real earnings management (REM) choices are connected with the ownership structure of politically connected businesses (PCBs). The authors also discuss the moderating role of audit quality (AQ) and family control (FC) on the relationship between PCBs and REM.Design/methodology/approachThe authors' study sample comprises firms registered on the Pakistan Stock Exchange (PSE). The sample examines the financial data of the firms that remained listed for the last eight years, i.e. from 2011 to 2018, excluding nonfinance companies and firms with incomplete data. The authors test the hypothesis using feasible generalized least squares (FGLS) regression methods.FindingsThe authors find that PCBs show a high level of involvement in income-decreasing REM compared to nonPCBs due to lower litigation risk in REM. However, the authors' results also show that two monitoring mechanisms, AQ and FC, curb the opportunistic behavior of PCBs and reduce the intensity of REM in PCBs.Practical implicationsThe findings of the study are beneficial in decision-making for both internal and external stakeholders, such as creditors, shareholders and competitors. In countries like Pakistan, which fall in the category of emerging economies, PCBs show involvement in income-decreasing REM to change the accurate picture of financial information to attain personal goals, and investors in such countries have a low level of knowledge about earnings management strategies; thus, this study offers detailed knowledge and information to investors and shareholders about political connections and REM. This plays a crucial role for regulators in stiffening the rules and regulations to further assist in more secure financial reporting.Originality/valueThis study contributes to the literature by providing a nuanced understanding of the interplay between political connections, REM, FC and AQ in the business context. Second, family-controlled businesses often exhibit distinct characteristics and governance structures compared to nonfamily-controlled firms. Exploring the moderating role of FC in the following relationship could provide valuable insights into how family dynamics influence the financial reporting practices of PCBs. Third, AQ is a critical factor in ensuring financial reporting transparency. However, the interaction between AQ, political connections, and REM remains relatively unexplored. This study explains how audit oversight affects the earnings management behavior of PCBs.

Stable suppliers and real earnings management: empirical evidence from private placements

ABSTRACT This study uses text analysis to extract stable supplier information from company annual reports and discusses its impact on the real earnings management strategies used during a private placement period. The results show that companies with stable suppliers conducted more downward real earnings management prior to a private placement than those without such suppliers to form collaborative relationships with suppliers for earnings management. The suppliers mainly assisted majority shareholders in tunnelling, conducting covert methods such as share price discounts and offering cash dividends. This could be driven by the prospect of obtaining more purchases from the company following the private placement. This study is the first to explore how stable suppliers assist companies in conducting real earnings management and majority shareholders with asset tunnelling. The findings contribute to the research on the economic consequences of supplier relationships and the influencing factors of equity financing and real earnings management.

AN ASSESSMENT OF THE DETERMINANTS OF EARNINGS MANAGEMENT IN NIGERIA

This study is based on the assessment of Tax Aggressiveness, Share Price, Return on Assets as determinants of Earnings Management among quoted industrial and consumer goods sectors in Nigeria between the periods of 2012-2022. A sample of thirty-two (32) firms were drawn out of the listed non-financial firms in Nigeria. The study was quantitative in nature and made use of secondary data which was sourced from the Nigerian Stock Exchange (NSE) factbook, National Bureau of Statistics, and annual reports of selected industrial and consumer goods firms. Descriptive statistics and correlation analysis was used to determine the nature of the data as well as the relationship between the independent and dependent variables. The pooled panel regression analysis, the Hausman test and the random effect model (REM) method of model estimation employed was used in the study. The findings revealed that share price and return on assets are the primary determinants that significantly affect the earnings management of publicly traded companies in the industrial and consumer goods sectors during the observed timeframe. Moreover, firm size is perceived as a significant control factor in determining earnings management. Tax aggressiveness on the other hand showed no significant impact on earnings management. Based on the findings the study recommended that Projects that enhance the firms' profitability should be at the center of the investment objective of managers overseeing industrial and consumer goods firms that are publicly traded. In addition, projects with favourable net present values should be embarked on by managers of industrial and consumer goods firms listed on the stock exchange. Furthermore, cutting edge earnings management strategies should be adopted by managers of industrial and consumer goods firms that are publicly traded. They can as well prioritize the utilization of tax aggressiveness.
 Keywords: Earnings Management, Tax Aggressiveness, Share Price, Return on Assets, Hausman Test.

Roles of board of directors and earnings management across SMEs life cycle: evidence from the UK

PurposeThis study aims to examine the role of the board of directors in affecting earnings management practices across small- and medium-sized enterprises (SMEs) life cycle.Design/methodology/approachData is collected from 280 SMEs listed on the London Stock Exchange during the period of 2009–2016. Fixed effects regression analysis is used to test the hypotheses.FindingsThis study shows that the impact of the board of directors' roles on earnings management practices varies depending on the SMEs life cycle stage. In the introduction, growth and decline stages of SMEs, the wealth creation role of the board is negatively significant with earnings management, while the wealth protection role of the board is positively significant in the growth and maturity phases. Results suggest that the board's responsibility to create wealth deters early-stage earnings management strategies, while protecting shareholder interests, in latter stages, leads to a decrease in earnings management.Practical implicationsThe findings suggest that corporate governance should be customized to the specific stage of the SMEs life cycle. Additionally, different life cycle stages may impose different requirements on corporate boards to shape the effectiveness of these mechanisms and constrain earnings management practices.Originality/valueTo the best of the authors’ knowledge, this study offers one of the first insights on the UK SMEs to understand how board functions and earnings management practices vary over SMEs life cycles. It will offer important information on the effect of board features on earnings management in SMEs in the UK and is anticipated to be of importance to policymakers, regulators, investors and practitioners.

Reporting comprehensive income and firms' earnings management

This study investigates the impact of reporting comprehensive income and other income through performance or equity statements on firms' earnings management through the selective sale of available-for-sale (AFS) securities. The objective is to explore how Canadian firms can improve transparency by altering managers' accounting behavior by switching from equity statements to income statements. The study used a difference-in-differences method in a quasi-experimental framework. The results showed that negative net income and post-period net income in performance statements can reduce realized gains and losses. Available-for-sale securities also affect these gains and losses in performance and equity statements. Single statement adopters only smooth earnings when net income is positive or when available-for-sale gains are large enough to offset negative earnings. Income statement (IS) adopters reduced earnings smoothing more than other treatment firms. Managers with less job security were found to be more likely to engage in earnings smoothing, and earnings smoothing decreased more during the pre-to-post period. Equity incentives reduced the tendency to smooth earnings, particularly in treatment firms with CEOs whose pay is more sensitive to stock price changes. Treatment firms outperform control firms in predicting future earnings using realized gains and losses on AFS securities per share. The findings suggest that firms manage earnings less effectively by selectively selling AFS securities when comprehensive income (CI) or other comprehensive income (OCI) is presented in performance statements. Firms win when earnings management is reduced because it reduces the informativeness of realized gains and losses on AFS securities. Managers will use more earnings management strategies as long as they have incentives.

Unveiling Earnings Management Strategies Through Financial Ratios: A Comprehensive Investigation of Audit Quality's Mediating Role in Jordan's Financial Landscape

Unveiling Earnings Management Strategies Through Financial Ratios: A Comprehensive Investigation of Audit Quality's Mediating Role in Jordan's Financial Landscape

The moderating role of COVID-19 pandemic on the relationship between CEO characteristics and earnings management: evidence from Bangladesh

This research uses accrual and real earnings management strategies in an emerging economy to evaluate how CEO characteristics (i.e. CEO nationality, duality, and compensation) affect earnings management and how the COVID-19 pandemic modifies this connection. The empirical investigation used annual reports from 2011 to 2021 of 118 listed enterprises in thirteen sectors of non-financial organizations in Bangladesh. The study divided the sample further into COVID-19 pandemic and pre-pandemic periods. Findings show that firms tend to engage less in real earnings management during the COVID-19 pandemic period compared to pre-pandemic period. CEO nationality significantly negatively affects accrual-earnings management, but CEO dualism positively affects real-earnings management. CEO compensation significantly impacts accrual and real earnings management. Finally, COVID-19 moderates the association between CEO compensation and real-earnings management positively. The study’s findings contribute to the corporate governance literature by providing insights into the influence of CEO characteristics on earnings management. This is the first study to consider the moderating role of the COVID-19 pandemic on the relationship between CEO traits and earnings management.

Financial distress and accrual and real earnings management in Polish public companies

Purpose: The study aims to assess differences in accrual and real earnings management strategies between financially distressed and non-distressed companies. The research sample includes public non-financial companies in Poland.Methodology/approach: Based on the GICS classification, cross-sectional regressions were estimated. Abnormal accruals were calculated using the Jones model and the modified Jones model. Based on Roychowdhury, real earnings management was proxied: abnormal operating cash flow, abnormal production costs, and abnormal discretionary expenses. Symptoms of financial difficulties were observed with discriminant analysis, net working capital strategy and ability to pay interest. Parametric and non-parametric statistical tests were used.Findings: There were statistically significant differences in earnings management between non-distressed and distressed companies. Financially healthy companies, as well as those with conservative net working capital strategies and a good ability to pay their interest, were more likely to manage earnings. However, they used selected to influence through real transactions.Research limitations/implications: Proxies for earnings management and financial difficulties are commonly recognized in the literature, but none of them is without imperfections. Therefore, many alternative research approaches have been used.Originality/value: Previous Polish research has not addressed the relationship be-tween earnings quality and financial distress. Multiple robustness tests were imple-mented.

Impact of Covid-19 on Earnings Management in Financial Reporting - Concept Paper

The outbreak of the COVID-19 pandemic in 2020 brought severe impacts on economies around the world. The market situation worsened and became uncertain due to the shock of the sudden virus outbreak. This has created issues for almost all industries globally as they must cater to the sudden changes in economies to stay competitive. Companies have taken the initiative by undertaking earnings management strategies in their accounting functions to present a strong performance in their financial reports. Due to this, the reliability and quality of financial reporting have been questioned. This paper explains the impacts of COVID-19 on earnings management in financial reporting. Three impacts are discussed: the enormous financial pressure on enterprises, the uncertainty due to the pandemic impacts on firm financial policies, and the increased information asymmetry between corporate outsiders and insiders. With these insights, suggestions are proposed on the control companies can implement to ensure the reliability and quality of the financial report.

Are State-Owned Enterprises Equally Reliable Information Suppliers? An Examination of the Impacts of State Ownership on Earnings Management Strategies of Chinese Enterprises

Earnings management refers to a company’s use of either accounting techniques (accrual-based earnings management) or real economic activities (real earnings management) to manipulate reported earnings and mislead users of financial information. It often indicates serious ethical issues in a company’s management, which will affect the reliability and sustainability of a firm’s services in the supply chain. Using A-share listed Chinese firms on the Shanghai and Shenzhen Stock Exchanges, we investigated the impacts of state ownership on management’s decision to select real or accrual-based earnings management strategies. We found that state-owned enterprises (SOEs) tend to favor real earnings management over accrual-based earnings management more than non-SOEs. Furthermore, those SOEs that are controlled by the central government engage in real earnings management more often than those controlled by local governments. We also examined whether media attention and litigation interact with state ownership to affect earnings management. We found that SOEs, especially central SOEs, with a high level of media attention or an incidence of litigation, are more likely to use real earnings management. Our research can assist firms in making better decisions in selecting business partners and service suppliers in an emerging market through the assessment of management integrity.

A critical analysis of the earnings management strategies in politically influenced firms

A critical analysis of the earnings management strategies in politically influenced firms

A critical analysis of the earnings management strategies in politically influenced firms

A critical analysis of the earnings management strategies in politically influenced firms

Information technology infrastructure and earnings management strategy: evidence from a quasi-natural experiment

ABSTRACT Taking the ‘Broadband China’ programme as a quasi-natural experiment, we intend to explore the effect of information technology infrastructure (Hereinafter, ITI) on earnings management strategy. Our results show that with the office location city selected as the pilot city, the firm will strategically reduce the accrual-based earnings management and increase real earnings management. In addition, we find that ITI can reduce audit delay, decrease financial restatement, increase analyst coverage, improve analyst forecast accuracy, promote the media to release original news, and increase investor postings, which is consistent with the view that ITI can improve stakeholders’ monitoring efficiency. Cross-sectional analyses show that the impact of ITI on earnings management strategy is more pronounced for firms with low corporate governance efficiency. This study is helpful to further understand the externalities of ITI to firms’ behaviour.

The impacts of audit committee expertise on real earnings management: Evidence from Hong Kong

This study examines the impacts of seven types of audit committee expertise (accounting academic, auditing, finance academic, CEO or finance director, other finance, industry and legal expertise) on real earnings management. 1054 firm-year observations are used in the study. The sample firms are collected from Hong Kong Hang Seng Composite Index between 2010 and 2015. Real earnings management are measured as abnormal cash flows, abnormal production costs, and abnormal discretionary expenditures. Using dynamic panel difference GMM model that is robust for endogeneity caused by reverse causality, we find that Hong Kong firms having strong audit committee expertise are more likely to have higher levels of real earnings management. Overall, our findings support the view that the strong accounting, finance and legal experts on the audit committee, no matter whether they have practical experience or academic experience, encourage managers to switch their earnings management strategies whilst CFO or finance director expertise constrains real earnings management. The findings are of potential interest to policymakers, professionals, boards of directors, audit firms and academics.