Earnings Manipulation Research Articles

On the Financial Determinants of the Piotroski F-Score: An Analysis of Borsa İstanbul Firms

This study investigates the factors effective on Piotroski F-score which is a proxy for financial health of the firms. Manufacturing firms operate in Borsa İstanbul are considered in the analyses with using the time period of 2017:Q1-2024:Q3. This study contributes to the literature by identifying financial determinants of Piotroski F-Score in Türkiye. Driscoll and Kraay (1998) estimator is used with fixed effect panel regression in order to handle issues of heteroscedasticity, cross sectional dependency and autocorrelation in the model. Altman Z-score, return on invested capital, market to book ratio, Tobin’s Q ratio and Beneish M-score significantly impact Piotroski F-score. According to the regression results, companies with lower financial distress risks (higher Altman Z-score) are expected to have better financial health. Similarly, those with improved return on invested capital tend to exhibit stronger financial health. Moreover, firms with higher market-to-book ratios are generally more profitable, potentially leading to higher Piotroski F-scores, indicating better financial health. A higher Tobin’s Q value suggests greater performance expectations from the company, which correlates with higher financial health. Conversely, a negative relation between the Beneish M-score and Piotroski F-score implies that companies with a higher likelihood of earnings manipulation tend to have weaker financial health.

Financial Distress and Earnings Management An Empirical Study of Non-Financial Firms Listed on the Indonesia Stock Exchange

This study examines the relationship between financial distress and earnings management among non-financial companies listed on the Indonesia Stock Exchange during the period 2018–2022. This study uses a quantitative approach using the modified Jones model to measure discretionary accruals, with leverage, firm size, and profitability included as control variables. Data from 342 companies are analyzed to determine whether companies facing financial distress are more likely to engage in earnings management as a strategy to improve their financial performance. The findings reveal that profitability has the strongest positive effect on earnings management, indicating that firms with higher profitability are more likely to manipulate earnings to improve financial results and meet market expectations. In contrast, leverage shows a significant negative effect, indicating that firms with higher debt levels are less likely to engage in earnings manipulation due to increased creditor monitoring and financial discipline. Meanwhile, financial distress and firm size have minimal impacts, with their coefficients showing no significant effect on discretionary accruals. These results highlight the importance of profitability and leverage as key drivers of earnings management while suggesting that financial distress and firm size play a smaller role in this context. This study acknowledges limitations, including its focus on non-financial firms in Indonesia, the five-year observation period, and the exclusion of additional factors such as governance and macroeconomic conditions. Future research could address these limitations by expanding the data set, incorporating more variables, and exploring other emerging markets.

Bank Diversification, Competition and Earnings Opacity

The paper explores the impact of bank diversification on earnings opacity. We aim at offering a comprehensive analysis by focusing on four dimensions of diversification: income, assets, funding, and loan portfolios. Using data from Vietnam over the period 2007–2022, we document consistent and robust evidence that increased diversification across all forms mitigates earnings management via discretionary loan loss provisions. To shed further light on this pattern, we examine how the banking complexity and opacity nexus varies with multiple measures of bank competition. We find that more intense competition in the banking system likely accentuates the impact of diversification on bank earnings manipulations. Our findings provide important implications related to bank business models and banking market structures in the era of financial deregulation and innovation.

Earnings manipulation behavior in the non-financial listed firms of Palestine: the implication of Beneish model

Earnings manipulation behavior in the non-financial listed firms of Palestine: the implication of Beneish model

Enterprise Intelligent Transformation and Earnings Management

The integration of a new generation of intelligent technology and manufacturing is profoundly changing the development model of manufacturing. Based on the sample of all A-share listed companies from 2003 to 2021, this paper examines the impact of intelligent transformation of enterprises on earnings management. The findings indicate a clear correlation between the intelligent transformation of enterprises and a notable decrease in earnings manipulation; The important ways that the intelligent transformation of enterprises affects earnings management are agency cost, media attention, and labor allocation ratio. The development level of the digital economy and the modernization level of the industrial chain play significant regulating roles between them. The influence of intelligent transformation on earnings management has the property of equity and regional heterogeneity. This paper inspires the reduction of risks in the process of intelligent transformation and the improvement of the internal governance system of enterprises. It also provides a new idea for studying the factors influencing earnings management.

Financial Distress and Earnings Management An Empirical Study of Non-Financial Firms Listed on the Indonesia Stock Exchange

This study examines the relationship between financial distress and earnings management among non-financial firms listed on the Indonesia Stock Exchange during the period 2018–2022. The research employs a quantitative approach using the modified Jones model to measure discretionary accruals, with leverage, firm size, and profitability included as control variables. The findings reveal that profitability has the strongest positive influence on earnings management, indicating that firms with higher profitability are more likely to manipulate earnings to enhance financial results and meet market expectations. Conversely, leverage demonstrates a significant negative effect, suggesting that firms with higher debt levels are less likely to engage in earnings manipulation due to increased creditor scrutiny and financial discipline. Meanwhile, financial distress and firm size have minimal impacts, with their coefficients showing no significant influence on discretionary accruals. These results highlight the importance of profitability and leverage as key drivers of earnings management while suggesting that financial distress and firm size play lesser roles in this context. The study acknowledges limitations, including its focus on non-financial firms in Indonesia, a five-year observation period, and the exclusion of additional factors like governance and macroeconomic conditions. Future research could address these limitations by expanding the dataset, incorporating more variables, and exploring other emerging markets.

Retraction notice: Integrated thinking, earnings manipulation and value creation: Malaysian empirical evidence

Retraction notice: Integrated thinking, earnings manipulation and value creation: Malaysian empirical evidence

Available-for-sale is available for hoarding: When nonfinancial firms hold financial assets

This paper empirically examines how listed non-financial firms use the “call option” feature of one of the most important financial assets, available-for-sale securities, as earnings manipulation tools owing to bad-news-hoarding motives. In 2007, China set its first accounting standards for financial instruments, which classify financial assets based on the highly subjective “managerial holding intention” criterion. We find that holding available-for-sale securities is positively associated with the likelihood of stock price crashes in Chinese listed firms. The main effect is more pronounced under lax external regulation and lower information transparency. It is further accentuated when CEOs have lower educational backgrounds, weaker competence in managing core business activities, or face greater performance pressures. Our findings indicate that, in typical emerging markets, fair value accounting may have unintended consequences, inducing non-financial firms to employ financial assets as tools to hoard bad news.

Shattering the glass ceiling: The unseen impact of gender diversity on financial transparency

This bibliometric analysis explores the relationship between financial reporting quality and top management team gender diversity within the field of management and business. A total of 395 journal articles related to financial reporting quality from 2003 to 2020 were reviewed. Utilizing ‘biblioshiny’, a web interface of the ‘bibliometric 3.0’ package in R-Studio, this study conducted a comprehensive bibliometric analysis and visualization. The research examines key sources, influential authors, countries, and thematic trends through co-occurrence network analysis and thematic mapping. By applying Bradford’s Law, core sources and publications are categorized based on output, distinguishing high-production from low-production sources. The findings highlight the increasing importance of gender diversity in top management teams and its positive impact on corporate governance and financial transparency. The presence of women in leadership roles fosters ethical behavior, reduces earnings manipulation, and enhances the overall quality of financial reporting. This analysis also reveals a strong connection between gender diversity and financial reporting quality, indicating that diverse leadership improves corporate governance practices. The study provides a foundation for future research, offering insights into key trends and research streams, and encourages further investigation into the impact of diverse leadership on financial outcomes across various organizational contexts.

Exploring the linkages between anti-money laundering guidelines and earnings manipulation techniques

The objective of this research is to investigate how adherence to anti-money laundering (AML) regulations affects the utilisation of accrual-based earnings management (AEM) and real earnings management (REM) strategies in the Middle East and North Africa (MENA) region. This study uses the System Generalized Method of Moment method to control for endogeneity due to omitted variables of 430 firms (4300 firm-year observations) from 2012 to 2021. The findings indicate that adhering to AML regulations results in a decrease in both aggressive AEM and REM. Our findings suggest a potential relationship between AML regulations and reduced earnings management, which warrants further investigation. By emphasising the importance of identifying accounting red flags and promoting greater transparency and accountability, our study supports a more radical perspective on the fight against corruption and money laundering.

The Unintended Consequences of Audit Materiality Disclosures on Whistleblowing Intentions

SYNOPSIS Within the accounting profession, there exists disagreement about the merits of disclosing auditors’ materiality thresholds. Professional standards require materiality threshold disclosures in the United Kingdom and The Netherlands but not in the United States. Additionally, some audit firms, like PwC-Finland and PwC-Sweden, elect to disclose materiality voluntarily. Although disclosing materiality has been shown to benefit investor decision-making, prior research also suggests that client personnel may take advantage of the information to engage in earnings manipulations below the materiality threshold. We contribute to this debate by examining the influence of materiality disclosures on employee whistleblowing intentions. We conduct an experiment wherein we manipulate materiality threshold disclosure (absent or present) and earnings manipulation amount (above or below materiality). We find evidence that the disclosure of the materiality threshold significantly decreases whistleblowing intentions when earnings manipulation falls below materiality and has no effect on whistleblowing intentions for above-materiality earnings manipulation. Data Availability: The data are available from the authors.

Busy independent directors and IPO company earnings management: Evidence from China

This study investigates the effect of busy independent directors on earnings management in Chinese initial public offering (IPO) companies from 2010 to 2020. Using various measures of busy independent directors, the results indicate that directors in IPO companies play a significant role in supervision and governance, thereby significantly mitigating earnings management. Busy independent directors, serving on multiple boards, may face time constraints, but, intriguingly, companies with such directors show a lower inclination for earnings manipulation. This suggests that despite potential time pressures, the independent oversight provided by these directors serves as a deterrent to financial reporting manipulation in the context of Chinese IPOs, underscoring the importance of robust corporate governance structures for transparency and reliability. Additionally, this study identifies specific conditions that amplify the constraining effect and finds that the effect of busy independent directors on earnings management in IPO companies is more significant in companies with high compensation for independent directors, independent directors serving off-site, and companies that receive higher media attention. Mechanism testing indicated that busy independent directors mitigate IPO firms’ earnings management by engaging reputable audit firms and enhancing the effectiveness of internal controls. This nuanced analysis offers valuable insights into how busy, independent directors actively contribute to alleviating the risks associated with earnings management during the IPO process. This study enhances our understanding of the governance benefits of active independent directors in multiple roles and offers novel perspectives on how stakeholders can influence and constrain earnings management in IPO companies.

ESG SCORES, EARNINGS MANAGEMENT AND FINANCIAL PERFORMANCE: EVIDENCE FROM POLAND

The paper's main aim is to investigate the relationship between the ESG activities scores and profitability metrics of 33 public companies listed on the Warsaw Stock Exchange. By utilizing the Refinitiv methodology, we answer whether a company's environmental, social and governance performance perspectives positively affect the ROA, ROE and ROC ratios or whether there is a negative relationship. A secondary objective of the research is to investigate the relationship between profitability and the magnitude of aggregate-based earnings management in the tested sample. The moderating effect of earnings manipulation on the links between ESG performance and a company's profitability metrics is a research gap that has not been well-studied to date.This research demonstrates contradictory results: a positive relationship between the social dimension of ESG activities and the financial performance of companies was observed regarding ROE and ROC ratios. The negative impact of the environmental pillar rank on the ROA ratio was captured only in selected regression analyses. The governance pillar score did not statistically affect the tested profitability metrics. On the other hand, we gathered evidence that public companies with a high range of non-financial disclosures tend to alter earnings via accruals, and discretionary accruals statistically affect the ROA, ROE and ROC ratios. This finding contrasts previous research claiming that the earnings management phenomenon is a typical agency problem and that the policy of non-mandatory disclosures following the ESG assumptions could constrain the asymmetry of information and managerial information advantages.

The Interconnectedness of Earnings Management, Corporate Governance Failures, and Global Economic Stability: A Critical Examination of the Impact of Earnings Manipulation on Financial Crises and Investor Trust in Global Markets

This study critically examines the interconnectedness of earnings management, corporate governance failures, and their impact on global economic stability and investor trust. Focusing on the Enron (1993–1995) and Wirecard (2015–2019) scandals, the research identifies key financial and governance indicators that contributed to these collapses, including CEO duality, weak board oversight, and manipulated financial reporting. Data for the analysis were drawn from corporate financial reports, macroeconomic indicators sourced from the World Bank, and stock market data from MarketWatch. Financial ratio assessments and regression models reveal a statistically significant negative relationship between GDP growth and abnormal returns for Enron (p = 0.014), while inflation had a strong positive impact on abnormal returns in both cases (p < 0.001). Time series analysis was applied to assess the macroeconomic consequences of corporate collapses on global financial markets. The findings demonstrate how declining GDP growth and rising inflation amplify market responses to governance failures. Recommendations include enhancing corporate governance frameworks, intensifying regulatory enforcement, and fostering global regulatory cooperation to safeguard financial markets and restore investor trust.

What Deters Earnings Management? A Benford's Law Comparison Between Publicized Detection Methods and Increased Regulations

ABSTRACTThis paper examines the impact of public awareness and regulatory changes on earnings management over time. Despite scrutiny from regulators, auditors, and investors, the deterrents of earnings management remain unclear. I explore whether public awareness, through the dissemination of research, can influence market behaviors and reduce earnings management activities due to increased detection and penalties. Alternatively, I investigate if stricter regulation plays a role in curbing earnings manipulation. Using Benford's Law, I apply Thomas’ (1989) approach and compare data from 1950 to 1985, 1990 to 2002, and 2003 to 2020. My findings indicate that while public awareness alone does not deter earnings management, heightened regulation, particularly post‐Sarbanes‐Oxley Act (SOX), significantly reduces such practices. This study contributes to the literature by highlighting the comparative impact of public awareness and regulatory changes on earnings management.

Institutional Imprints and Corporate Misconduct: Unravelling the Interplay of Economic History and Firm Choices on Earnings Manipulation in an Emerging Economy

This study investigates the impact of firms’ legacy institutional imprints on its engagement in corporate misconduct. We discover that a closed economic regime’s protectionist policies inscribe imprints in the form of opaque organizational routines and cause incumbent firms to develop competitive limitations. Utilizing the theoretical principles of the organizational imprinting theory, this research attests to the endurance of corruptive routines and argues that the degree of closed economy imprints increases firms’ engagement in income-increasing earnings management in the post-liberalization period. Furthermore, we find that the impact of imprints is weakened by firms’ choices on international exposure and internal innovation. By utilizing the historical data on Indian economic policies from 1956 to 1991 and analyzing a sample of 18,432 firm-year observations for 2,396 listed Indian manufacturing firms from 1997 to 2007, we find support for our hypotheses.

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.

Investor Sentiment, Managerial Manipulation, and Stock Returns

AbstractThe degree of earnings manipulation has been shown to be positively associated with stock returns at the aggregate level but negatively so in the cross‐ section. We examine, both theoretically and empirically, the role of investor sentiment in accounting for such relations. We find that these patterns are primarily driven by high‐sentiment periods. Embedding investor sentiment into a game‐theoretic model of earnings manipulation with a continuum of firms delivers consistent predictions. Our analysis highlights the importance of increased scrutiny of corporate reporting during market booms, when manipulation is widespread and adds fuel to price exuberance.

Behind closed doors: unveiling earnings management in private subsidiaries of public firms

PurposeThis study examines the earnings quality of private-subsidiary firms using a large sample data from India.Design/methodology/approachThe impact of parent–subsidiary relationship on earnings quality is examined using two common proxies. Findings are robust to alternative research designs, including different earnings quality proxies, endogeneity and matching techniques.FindingsThe study finds that private firms that are subsidiaries of listed firms tend to have lesser (greater) earnings quality (manipulation). Further, the study reports that this relationship is more pronounced when the parent firm is relatively larger than the subsidiaries. The study finds no evidence that Big 4 affiliation of the parent company improves earnings quality among private subsidiaries; instead, it exacerbates earnings manipulation in some cases. Finally, the authors document that subsidiary firms use tax management, as proxied by book tax differences, to engage in income-increasing earnings manipulation.Research limitations/implicationsThis study examines how affiliation with a listed entity as a subsidiary impacts the earnings quality of private companies. Future research could investigate the financial reporting practices of both private subsidiary firms and standalone private firms, comparing them in similar or differing regulatory environments across various countries.Practical implicationsThe findings of this study will help investors, bankers, creditors and regulators to understand the financial reporting of private firms. The study calls for enhanced audit quality at the subsidiary level by making the auditor of the parent firm responsible for auditing a subsidiary, a practice that is currently absent in India.Originality/valueThe results contribute to the existing debate on how firms manage earnings using data of private firms in a large emerging market setting. Previous research has not paid enough attention to the earnings quality of private subsidiaries. The study also emphasizes the necessity for a more robust system of governance and supervision for private firms, particularly in India and generally in other countries.

Measuring the Prevalence of Earnings Manipulations: A Novel Approach

ABSTRACTWe provide prevalence estimates for five forms of earnings manipulation based on executives’ reports about their firms’ actual reporting practices. After preregistering our methods and analyses via the Journal of Accounting Research’s registration‐based editorial process, we recruit nearly a thousand executives from firms listed in the Russell 3000 Index to participate in either a survey or a list experiment; the hallmark of the latter being additional privacy protections designed to promote honest disclosure about self‐incriminating information. In our survey, 26.8% of executives disclose at least one form of earnings manipulation at their firm in the 2018–2023 period: 18.0% report changing an operational activity to meet a near‐term earnings target at the expense of long‐term value (i.e., real earnings management), 8.8% report intentionally obfuscating unfavorable information, 6.6% report manipulating accruals, 3.9% report withholding material information, and 0.0% report accounting fraud. Our list experiment produces an economically higher result in two cases, estimating that 29.9% of firms engaged in real earnings management and 12.4% committed accounting fraud over the same time period. We conclude that while a traditional survey can provide credible lower‐bound estimates for the prevalence of many forms of earnings manipulation, list experiments encourage more honest disclosure in some cases.