Earnings Management Techniques Research Articles

PROFITABILITAS, FINANCIAL LEVERAGE, DAN CASH HOLDING TERHADAP PERATAAN LABA DENGAN GOOD CORPORATE GOVERNANCE SEBAGAI VARIABEL MODERASI

Income smoothing is one of the earnings management techniques to manage company profits. There are several phenomena regarding income smoothing carried out by several companies in Indonesia. This research develops from previous research by adding one variable, namely profitability. This research used binary logistic regression methods and Moderated Regression Analysis (MRA). Data is taken from annual reports in food and beverage companies. The results of this study indicate that profitability has a positive effect on income smoothing, financial leverage has a negative effect on income smoothing, cash holding has no effect on income smoothing. The moderation results show that good corporate governance moderates the effect of profitability and financial leverage on income smoothing, but good corporate governance does not moderate the effect of cash holding on income smoothing. The results of this study are expected to be useful for further research and as a consideration for decision making for investors.

The Influence of Related Party Transactions on Earnings Management in Indonesian Food and Beverage Sub-Sector Companies: Ownership Concentration as a Moderating Variable

This research tests how transactions among related parties influence the management of earnings, considering ownership concentration as a moderating factor. The research specifically targets businesses inside of the food and beverage sub- division that are registered on the Indonesia Stock Exchange (IDX) during the phase by 2016 to 2022. Earnings management, a tactic frequently utilized by corporate executives to manipulate reported financial outcomes, is associated by both accrual-based and real earnings management techniques. This research emphasizes how transactions by related parties can enable accrual earnings management, especially in circumstances defined by significant ownership concentration, where major stockholders might leverage their influence to the disadvantage of smaller group stockholders. Through moderated regression analysis, this research investigates the extent to which ownership concentration can enhance or reduce the influence of related party transactions on earnings management. The outcomes reveal that a high concentration of ownership intensifies earnings manipulation, particularly in less regulated settings such as Indonesia, where conflicts of interest among majority and smaller group stockholders are prevalent. These outcomes add to the expanding literary works on corporate governance and offer valuable empirical insights for stakeholders concerning the monitoring of related party transactions.

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.

PENGARUH PROFITABILITAS, LEVERAGE, DAN UKURAN PERUSAHAAN TERHADAP MANAJEMEN LABA

The fundamental goal of this research is to investigate the impact of various, debt, and company size play a role in the adoption of earnings management techniques. Companies in the banking sector that were traded on the Indonesia Stock Exchange (IDX) were the primary focus of the study, both in terms of the population and the sample. During the sampling phase, the researchers used a purposive sample strategy. The sample consisted of a total of 32 businesses. Descriptive statistics, tests of classical assumptions, multiple linear regression, analysis of coefficient of determination, F-test, and t-test were all used to compile this report. As can be seen from the data, the profitability variable does not play a significant role in the process of earnings management. Earnings management appears to be influenced by both the leverage variable and the firm's size.

The Nexus between Corporate Lyfe Cycle and Earnings Management at Companies Listed on the Bucharest Stock Exchange

This research investigates the nexus between the corporate life cycle (CLC) and accrual-based earnings management (AEM) and real earnings management (REM) practices. Companies listed on the main segment of the Bucharest Stock Exchange between 2007 and 2021 are analyzed through fixed effects and random effects models. The regression analysis uncovers that earnings management practices vary based on the developmental stage of the company. In the introduction stage, Romanian companies tend to prefer AEM techniques, while in the growth and maturity phases, REM practices are more prevalent. The conditions in which firms operate, the pressure from the capital market and the discretion over costs characteristic of each stage of development explain the preference for a certain method of earnings management. Overall, this investigation helps clarify CLC's role in adopting earnings management techniques (AEM/REM) and signals the need to pay particular attention to the quality of financial reporting of companies in the early stages of development. The findings hold significance for auditors, financial analysts, investors, lenders, and regulators alike.

Mediation effect of earnings management techniques on the relationship between CSR and corporate performance: evidence from the civil law countries

Mediation effect of earnings management techniques on the relationship between CSR and corporate performance: evidence from the civil law countries

Ethnicity-based director network and earnings quality

ABSTRACT We exploit the ethnic value differences in Malaysia to investigate the role of ethnicity-based director network in earnings management. Using various centrality measures from social network analysis, we map the ethnicity-based network of 4,416 directors for a sample of 734 listed firms. Our results show central directors are associated with more aggressive earnings management, suggesting that the reciprocal relationships created by the network allow central directors to learn about earnings management techniques and/or to gain better resources to facilitate earnings management techniques. Whilst firms with more central directors in either the Bumiputera or non-Bumiputera network show a greater propensity to engage in earnings management, those in the non-Bumiputera network exhibit more aggressive earnings management practices.

CEO Compensation and Earnings Management-The Moderating Role of COVID-19 Pandemic: Evidence from Bangladesh

This study examines the impact of CEO compensation on earnings management and the moderating role of COVID-19 pandemic on this connection using accrual and real earnings management techniques in an emerging economy context. The annual reports of non-financial enterprises in Bangladesh from 2011 to 2021 have been analyzed in order to compile the data being collected. The methodologies of accrual and real earnings management are utilized in the beginning stages of the study in order to measure earnings management. Following this, the research employs the ordinary least square model in order to determine the findings of the regression. According to the findings of the study, there is a negative correlation between the compensation of CEOs and both accrual and actual earnings management. In addition, during the COVID-19 pandemic phase, businesses had a tendency to participate in real earnings management less frequently than they did before the pandemic outbreak. It is interesting to note that the data underline the fact that CEO compensation and the COVID-19 epidemic combined have a favorable impact on real-earnings management. The findings of the study make a contribution to the existing body of literature on corporate governance by offering insights into the influence that CEO compensation has on earnings management. It is anticipated that the findings of the study will be helpful for corporate policymakers in the process of formulating policies that are suited for lowering the earning management strategies that are utilized in businesses.

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.

High-speed rail network and earnings management techniques usage trade-off: the moderating effects of governance and religion

PurposeThis study aims to investigate the impact of the development of high-speed rail (HSR) network on earnings management, especially on the trade-off between the usage of accruals-based earnings management (AM) and real earnings management (RM) techniques, and consequently, examines the extent to which the HSR network–earnings management nexus is moderated by governance and religion factors.Design/methodology/approachUsing a sample of Chinese A-listed firms over an 11-year period, this study uses regression techniques as the baseline methodology while controlling for industry and year-fixed effects. The authors also use endogeneity tests (including instrumental variable method, Generalized Methods of Moments estimation and difference-in-difference) and different robustness checks.FindingsThe key findings are threefold. First, the HSR network development reduces AM. This suggests that the presence of HSR network is effective in reducing information asymmetry. Second, the use of RM technique increases with the HSR network development. This indicates that managers do not seem to engage in less earnings management with the HSR network development but instead appear to switch from the easy-to-detect AM to the more costly RM approach. Finally, the HSR network and earnings management nexus is moderated by governance and religion factors.Originality/valueThis study provides new evidence on the trade-off between AM and RM by managers and pioneers in examining the impacts of governance and religion factors on the relationship between the HSR network and the trade-off of earnings management techniques.

Earnings management and sustainability assurance: The moderating role of CSR committee

AbstractThis study examines the effect of earnings management on the decision to acquire sustainability assurance (SA) reports. It also offers insight into the moderating impact of corporate social responsibility (CSR) committee over the earnings management‐SA nexus. To test the hypotheses, a logit regression for panel data is employed for a sample of 2972 firm‐year observations of non‐financial firms listed on the STOXX Europe 600 during the period 2012–2018. The findings reveal that firms that involve in earnings management, either accrual earnings management or real activities manipulation, tend to obtain SA reports to gain, repair, or maintain their legitimacy. Furthermore, the outcomes show that the existence of CSR committee alleviates the symbolic use of SA. Overall, this study highlights that the sustainability reporting assurance process can be used as a tool to deviate or shift stakeholders' attention from the earnings management techniques used in their reporting. The results, therefore, will benefit standard‐setters, policymakers, and stakeholders to be more cautious in differentiating between the substantial and symbolic SA reports.

Internal control, debt risk, CEO education and earnings management evidence from China

PurposeThis study aims to explore how earnings management techniques are affected by corporate financial debt risk (FDR), internal control (IC) effectiveness and CEO education.Design/methodology/approachThe study uses a sample from listed firms in China from 2010 to 2017, comprising different industries, including agriculture, forestry, livestock farming and fishing; mining; manufacturing; electric power, gas and water production and supply; construction; transport and storage; information technology; the real estate industry; social services; and communication and cultural. The regression analysis is used to test the hypotheses. The two-stage least squares technique is used to check for endogeneity issues.FindingsThe study finds that firms are less likely to manage real earnings when they have more robust IC and FDR. Likewise, companies with weak ICs are more likely to manipulate real earnings. Besides, the study finds an influence of CEO education on the relationship between IC, FDR and real earnings management (REM). These results can be applied to the sectors in the sample covered by the research, and the authors do not overlook the energy industry sector for the importance of its role in the economy.Research limitations/implicationsThere are some limitations for the researcher when performing any research, and this study is no exception. Researchers are urged to take these circumstances into consideration when generalizing or comparing the results because the methods used to calculate the measurement variables in each study may differ somewhat from those used in other research. In addition, expanding the current research design to incorporate additional nations may be an area of interest for future research and could aid in evaluating the effects of nation-specific elements (such as inflation, culture, legal systems and political considerations) on the usefulness of IC and decreasing FDR. Second, the current study focuses on the impact of IC and FDR on REM; this paper does not dissect the “black box” of IC and consider how each element affects earnings management. Future research may need to focus specifically on how effective IC would affect earnings management and precisely what IC mechanisms would discourage the management of earnings.Practical implicationsHelping companies listed in China to make decisions and improve investors’ vision of the results of real companies’ businesses, as well as helping management to avoid falling into debt risk and the consequent effects and manipulation of earnings.Originality/valueBy highlighting the significance of IC and debt risk in enhancing information quality in China, the results contribute to the body of work examining the relationship between IC, FDR and REM. In addition, this study uses a CEO’s education to moderate this link.

Earnings management: a three-decade analysis and future prospects

PurposeThis paper undertakes an extensive and systematic review of the literature on earnings management (EM) over the past three decades (1992–2022). Furthermore, the study identifies emerging research themes and proposes future avenues for further investigation in the realm of EM.Design/methodology/approachFor this study, a comprehensive collection of 2,775 articles on EM published between 1992 and 2022 was extracted from the Scopus database. The author employed various tools, including Microsoft Excel, R studio, Gephi and visualization of similarities viewer, to conduct bibliometric, content, thematic and cluster analyses. Additionally, the study examined the literature across three distinct periods: prior to the enactment of the Sarbanes-Oxley Act (1992–2001), subsequent to the implementation of the Sarbanes-Oxley Act (2002–2012), and after the adoption of International Financial Reporting Standards (2013–2022) to draw more inferences and insights on EM research.FindingsThe study identifies three major themes, namely the operationalization of EM constructs, the trade-off between EM tools (accrual EM, real EM and classification shifting) and the role of corporate governance in mitigating EM in emerging markets. Existing literature in these areas presents mixed and inconclusive findings, suggesting the need for further theoretical development. Further, the study findings observe a shift in research focus over time: initially, understanding manipulation techniques, then evaluating regulatory measures, and more recently, investigating the impact of global accounting standards. Several emerging research themes (technology advancements, cross-cultural and cross-national studies, sustainability, behavioral aspects and non-financial indicators of EM) have been identified. This study subsequent analysis reveals an evolving EM landscape, with researchers from disciplines like data science, computer science and engineering applying their analytical expertise to detect EM anomalies. Furthermore, this study offers significant insights into sophisticated EM techniques such as neural networks, machine learning techniques and hidden Markov models, among others, as well as relevant theories including dynamic capabilities theory, learning curve theory, psychological contract theory and normative institutional theory. These techniques and theories demonstrate the need for further advancement in the field of EM. Lastly, the findings shed light on prominent EM journals, authors and countries.Originality/valueThis study conducts quantitative bibliometric and thematic analyses of the existing literature on EM while identifying areas that require further development to advance EM research.

Earnings Management Ethicality and Application in the Kenyan Public Sector: A Critical Review

Purpose: This is a critical review of the empirical literature on earnings management ethicality and its application in public sector organizations in the Kenyan context. Design/methodology/approach: Semi-systematic review approach and thematic/content analysis technique were utilized in forming opinions on deductions of the study by reviewing previous publications between 2008-2022. Findings: Outcomes of this study portray that the main factors influencing the management of earnings include; a conducive environment that permits practicing creative accounting without stakeholders’ knowledge, dodging declaring losses in the economic reports, meeting analyst predictions, circumventing submission of higher taxes, to qualify access to debt, contracting motivations, and to accomplish perks knotted to performance. Moreover, there is legitimate and illegitimate management of earnings since there is no consensus in regard to the ethicality of earnings management. Further, this review evidences that both accrual and real earnings management techniques are practiced by managers during reporting. Additionally, there are mixed results as to whether creative accounting is practiced in the public sector or not, and with reference to Kenya, no studies on earnings management ethicality have ever been conducted. Research limitations/implications: There are limited studies on earnings management ethicality in the public sector both in Kenya and globally. Besides, this is a qualitative study that depended on the previously published data in its entirety. This then, implies that all the findings here are not first-hand and are purely dependent on the findings of other studies that had been published. The researcher, therefore, had no control in regard to ascertaining the accuracy of the previous data analyzed. In mitigating these limitations, the majority of the publications included in this study were from high ranked journals. The bulk of the literature reviewed was from research work already conducted in other countries. Originality/value: This study contributes to accounting theory as an area of study. It depicts the deductive approach of research which can then be embraced by other graduate accounting students in furthering accounting research. Besides, it contributes to strategy makers like the Kenya Accounting Standards Board in the formulation and implementation of accounting principles. It also forms a basis for further research in the management of earnings and its ethicality among public sector firms. That is, no other study has been done in Kenya and just a few studies have been carried out globally.

Research and development spending in the pharmaceutical industry: Does board gender diversity matter?

The focus of this paper is twofold; the primary objective is investigating the impact of board gender diversity on firms’ research and development (R&D) investment as an innovation driver. The secondary objective is looking at R&D expenditure from an opportunistic earnings management practice, suggesting that this expenditure could be used as a real earnings management technique to enhance firms’ earnings. The study sample comprised all pharmaceutical firms listed in the Bloomberg database between the years 2018 and 2021. The study’s findings indicated that the presence of female directors is correlated with greater innovation as firms are prone to invest more in R&D projects, hence, practising their strategic role effectively. Furthermore, a significant negative relationship is found between the presence of female directors and real earnings management practices, indicating that female directors would effectively contribute to board monitoring and as a result, the managerial opportunistic practices are eliminated. Our findings remain robust after using alternative econometric methods to address the endogeneity issue and applying alternative gender diversity proxies. This paper contributes to the literature by providing additional insight into the vague relationship between female directors and R&D spending by specifically looking into this relationship through different theoretical lenses: upper echelons theory and agency theory. The findings of the study are valuable for both pharmaceutical firms and policymakers interested in boosting innovation investment and improving monitoring mechanisms within a corporate governance structure.

What do we know about real earnings management in the GCC?

PurposeThe authors empirically investigate the association between acquisition, ownership structure and accrual earnings management (AEM) on real earnings management (REM) using Gulf Cooperation Council (GCC)-listed firms' context.Design/methodology/approachThe authors' sample consists of 1,892 firm-year observations for the period from 2007–2017, and the authors adopt a panel data approach in investigating the interrelationships in this study. The authors employ different econometrics approach to test the authors' hypotheses.FindingsThe findings reveal that acquiring companies engage more in AEM if compared to REM. In terms of ownership structure, institutional ownership and state ownership mitigate the engagement in REM, whereas foreign ownership is found to be an ineffective mechanism in reducing engagement in REM. The authors report similar findings on ownership structure for AEM. The authors also find that the GCC firms engage more in REM when the firms engage in AEM, suggesting a complementary relation between these two earnings management techniques. These findings are robust after controlling for different aspects including any endogeneity issue in the authors' models.Originality/valueThe authors' research highlights the importance of understanding REM and AEM dynamics in GCC context. Also, the authors' findings on ownership structure suggest that GCC-listed firms can gain from institutional and state ownership which restricts earnings management, improving firm transparency and subsequently impacting firm performance.

Real earnings management trends in the context of the COVID-19 pandemic: The case of non-financial listed companies in Vietnam

Real earnings management comprises the intervention by managers intending to change business strategies or policies to achieve specific goals. The paper aims to examine trends and levels of real earnings management in the context of the COVID-19 pandemic in Vietnam. The study uses time series data, and the sample includes 1,800 observations from 2016 to 2021. The methods of the study are regression analyses of the real earnings management model. The results indicate that the COVID-19 pandemic positively and significantly affected real earnings management of companies listed on the Vietnamese stock exchange. The trends and levels of real earnings management in the context of the COVID-19 pandemic increase depending on the severity of the pandemic. In terms of applications, the study provides evidence that the quality of financial reporting is lower during the pandemic. Listed enterprises in Vietnam are using high financial leverage, leading to a higher vulnerability to shocks such as the pandemic. Therefore, the real earnings management technique mainly used by managers is operating cash flow adjustment by using income maximization strategies to increase the ability to borrow capital to maintain business operations. The study suggests that the choice of income maximization or income minimization strategy depends mainly on commitments with the capital provider (credit institutions), specific contexts, and economic factors.

The female audit committee members expertise and experience: is there a trade-off between accrual-based and real earnings management?

Purpose This paper aims to examine the impact of female AC representation (ACFEMALE) following the adoption of gender quota legislation on the trade-off between accrual-based (AEM) and real earnings management (REM), taking into consideration their demographic attributes. Design/methodology/approach A sample of 89 companies listed in the SBF 120 during the period 2012–2018 has been employed. The authors have obtained the explanatory variables using the principal component analysis method. To provide empirical evidence for the testable hypotheses, the authors have estimated a least squares regression. A differences-in-differences analysis has been estimated to analyze the impact of the gender quota law imposition. Findings The regression results indicate that companies with a higher proportion of ACFEMALE have more tendency to use REM rather than AEM. The authors further denote that the ACFEMALE expertise negatively affects AEM. Moreover, the authors find that the ACFEMALE experience helps reduce both AEM and REM. Results from the DID analysis exhibit that the ACFEMALE effect on the trade-off between REM and AEM occurs for the period that follows the implementation of the French gender quota law. Furthermore, the authors denote that the negative link between the ACFEMALE experience and AEM and REM dissipates for both the pre- and the postgender quota law adoption. Originality/value This study extends the prior existing research by examining, for the first time, the relationship between female directors’ appointments and the trade-off between accrual-based and REM. As well as, the research provides primary evidence on the channels through which female directors may affect the managerial preference regarding the earnings management techniques AEM or REM.

The Covid-19 outbreak, corporate financial distress and earnings management

This study explores the association between the Covid-19 outbreak, corporate financial distress and earnings management practices in China. We investigate whether firms took advantage of the downturn in economic conditions during the pandemic to adjust their earnings using different earnings management techniques. Utilising a sample of 1832 listed firms and underlying theoretical frameworks (i.e., positive accounting and signalling theory), we find that firms were more inclined to manage earnings during the pandemic period. They favoured using the accrual-based rather than the real activity-based earnings management technique. We also find that firms engaged more in income-increasing practices in the shadow of the outbreak. In addition, our results further demonstrate that financially distressed firms were involved in earnings management, particularly accrual-based earnings management. However, compared to privately-owned firms, state-owned enterprises seem to be involved less in earnings management during the Covid-19 pandemic. Findings from this study raise some concerns for policymakers about the credibility of financial reporting information during Covid-19.