Impact Of Earnings Management Research Articles

How does earnings management impact annual report readability?

This research investigates the relationship between earnings management and annual report readability for companies listed on the Singapore Stock Exchange (SGX). Research on earnings management (EM) and the ability to read the annual report play a crucial role for investors as well as other stakeholders. The extent of earnings management can be determined based on annual reports. The analysis is based on the data of 251 domestic companies listed on the SGX from 2016 to 2021. Regression analysis of panel data was conducted using STATA version 15 software in this research. The result shows that companies with more aggressive earnings management tend to make annual reports more complex and, hence, less readable. In addition, the study also shows that the impact of earnings management on the annual report readability for enterprises of different sizes, profits, ages, and levels of financial distress is the same. Theoretically, the findings of this research for a developed financial market in Asia (Singapore) further confirm and reinforce the findings about the relationship between earnings management and report readability. In addition, one may draw important practical implications for investors as well as stakeholders in general; in particular, stakeholders may have more evidence for suspicions about earnings management whenever the annual reports become more difficult to read and understand.

Earnings Management and Bank Liquidity Creation in an Emerging Market

This paper empirically examines the impact of bank earnings opacity on liquidity creation. Using a sample of commercial banks in Vietnam from 2007 to 2019, we find that more opaque banks tend to reduce liquidity creation growth. We further offer sharp evidence that the impact of earnings management on bank liquidity creation depends on bank-specific characteristics. More precisely, the negative impact of bank earnings management on banks’ core function is stronger for banks that are more poorly capitalised, less liquid, smaller and less profitable. With these findings, our work display implications on the supply-side effect (i.e., the limited access to funding of financially weak banks).

Impact of earnings management on dividend policy: does board independence matter?

PurposeThis paper empirically examines whether sophisticated governance mechanism affects the relationship between earnings management and dividend policy of non-financial firms.Design/methodology/approachThe sample of the study includes non-financial firms listed on the stock exchanges of twenty developed and developing economies from the period 2005–2017. The Generalized Method of Moments (GMM) was applied to estimate the econometric models.FindingsThe results confirm the positive association between earning management and the dividend payout ratio of the sample firms. These findings are in line with the signaling theory, which suggests that firms engage in earnings manipulation to signal to the market that they can maintain a smooth dividend distribution. Moreover, findings suggest that board independence, being a mechanism of corporate governance, significantly negatively moderated the relationship between earnings management and the dividend payout ratio of non-financial firms.Practical implicationsThe findings provide valuable suggestions to government bodies, regulatory authorities and corporate managers to focus on the effectiveness of governance mechanisms to improve the reliability of financial reports.Originality/valueThese findings imply that the effect of earning management on the dividend payout ratio is less pronounced in firms with more independent directors on the company board.

Firm Performance, Corporate Social Responsibility and the Impact of Earnings Management during COVID-19: Evidence from MENA Region

This study examines the relationship between corporate social responsibility (CSR) and firm performance in the MENA region before and after COVID-19. It also seeks to understand how earnings management moderates that relationship. The final study sample consisted of 661 firm-year observations from 2007 to 2021. This study employed the random effect estimation (RE) method to examine the relationships and used GMM regression for robustness to investigate the results’ consistency. The RE findings demonstrate that environmental, social, and governance (ESG) scores have a favorable impact on return on assets (ROA), even after adjusting for COVID-19. Regarding the moderating effect of EM, the outcome shows that CSR has an insignificant positive impact on financial performance. However, the results demonstrate that ESG has little impact on ROE. Additionally, the findings show a strong positive link between ESG and Tobin’s Q. This study provides policymakers, board directors, and managers with a set of recommendations that are relevant to the context by enabling a better understanding of how managers react to CSR disclosure and the impact of minimizing earnings manipulation on firm performance.

Earnings management and underperformance after seasoned equity offerings: a cross-country study

PurposeThis purpose of this study is to examine the association between earnings management (accruals earnings management (AEM) and/or real activities manipulation (RAM)) and firm underperformance following seasoned equity offerings (SEOs) using cross-country data.Design/methodology/approachThe study applies ordinary least squares regression analyses to a sample of 11,764 observations on firms from 22 countries over the period from 2005 to 2017. The methods include weighted least squares regression, sub-sampling approach and alternative measures of firm performance, earnings management and legal regime for robustness tests as well as a two-stage least squares instrumental variable (IV) approach to address endogeneity concerns.FindingsThe results suggest that RAM has a greater negative impact on post-SEO performance than AEM. The result is economically significant for RAM only. The results also reveal that the negative impact of earnings management, in particular RAM, on post-SEO performance is greater in countries with a strong legal regime than in other countries.Practical implicationsEarnings management around SEOs has important implications for investors, regulators and policymakers. The study suggests that policymakers should improve the current legal conditions to promote fairness in the equity market.Originality/valueThe results from the cross-country data support earlier results from single-country studies on the impact of earnings management on post-SEO performance. The study also provides new evidence on the variation in the impact of earnings management according to the strength of the legal regime operating in a country.

Value Relevance of Earnings and Book Value: Impact of Earnings Management and Family-Owned Firms

The purpose of this study is to investigate whether family-owned firms and earnings management as a result of financial distress affect the value relevance of earnings and book value. The study is based on companies listed on the Indonesia Stock Exchange (IDX). An unbalanced panel dataset of 592 firms trading in the IDX from 2012 to 2017 was used to test the price model. Results reveal that owing to high financial distress, earnings management through an income-increasing strategy was opportunistically conducted. Moreover, earnings management (as opposed to financial transparency, which is a principle of sustainability) decreases the value relevance of earnings. Due to high financial distress, there is a trade-off between the value of earnings and relevance of book value in the presence of earnings management. Further, results demonstrate that the value relevance of earnings in family-owned firms is higher than in nonfamily-owned firms in Indonesia. It indicates that earnings management due to high financial distress contributes to the alignment effect on family firms.

Impact of Earnings Management on Profitability of Commercial Banks: Evidence from India

This article assesses the impact of earnings management on bank’s current and future financial performance. A bank-specific model, invented by Beatty et al. (2002, Accounting Review, vol. 77, pp. 547–570) and modified by Mangala and Singla (2021; Vision: The Journal of Business Perspective, vol. 25, pp. 159–167), is applied to measure earnings management. Cross-sectional regression is applied to analyse the impact of earnings management on the financial performance of banks for a time period of 7 years (from 2012–2013 to 2018–2019.). The results exhibit that Indian banks actively manage earnings. Earnings management reduces current year’s return on equity, return on assets and net interest margin. Current year’s earnings management also negatively influences following 2 years’ return on equity and net interest margin. Thus, earnings management has major negative implications on banks’ financial performance, not only in the year of earnings management but also in the years to come. In order to curtail earnings management, while examining the financial statements, auditors should be vigilant, and the Reserve Bank of India (the apex regulator) should take punitive actions against such malpractices.

The Impact of Earnings Management on the Value of Companies – The Role of Ownership Structure

The aim of our paper is to test whether there is a relationship between earnings management and the market value of companies with different ownership structures. Additionally, we examined whether ownership control determines earnings management. Our study was conducted on 632 non-financial companies listed on the Warsaw Stock Exchange between 2013 and 2020. We have assessed panel data models showing that there is no relationship between earnings management and company value. However, there is a negative and statistically significant relationship for companies without a majority direct investor. We also showed that, despite the different impact of manipulation on company value, there are no statistically significant differences in earnings management between companies with different ownership structures. The originality of our study lies in conducting an analysis of earnings management taking into account the degree of ownership control.

Directors' reports cosmetic treatment: impact of earnings management on financial report readability

Directors' reports cosmetic treatment: impact of earnings management on financial report readability

Directors' reports cosmetic treatment: impact of earnings management on financial report readability

Directors' reports cosmetic treatment: impact of earnings management on financial report readability

The Value Relevance of Earnings in the Presence of Earnings Management: Indonesia as Evidence

This study examines the influence of earnings management on the value relevance of earnings, that is, the value relevance of level and changes of earnings. The sample consists of manufacturing companies listed on the Indonesia Stock Exchange (IDX), comprising 606 observations. By using panel data regression, this study provides evidence that the level of earnings has no value relevance; conversely, changes in earnings have value relevance, indicating that earnings have less value relevance. Furthermore, the results of the relevance test of earnings value with the presence of earnings management show that the relevance of the value of the earnings level increases with the presence of earnings management; on the contrary, the relevance of earnings changes decreases with the presence of earnings management. Based on the value of earnings response coefficient, the impact of earnings management on the value relevance of level and changes of earnings appears to indicate that earnings management reduces the value relevance of earnings.

Dividend policy, earnings management and the moderating effect of corporate governance in the French context

PurposeThe purpose of this paper is to examine the moderating effect of corporate governance on the impact of earnings management on dividend policy.Design/methodology/approachIn this paper, the authors selected French non-financial companies listed on the CAC All Tradable index during the 2008–2015 period. Feasible generalized least square regression method is used to estimate the econometric models.FindingsThe empirical results allowed the authors to confirm and/or reject certain hypotheses. First, the ownership concentration seems to positively moderate the impact of earnings management on dividend policy. Another conclusion that the authors have been able to draw is that the effect of earnings management on dividend policy is more favorable in the case of firms with a small director’s board.Practical implicationsOur results have shown that French firms run earnings to inform the market that they can distribute dividends. Therefore, we recommend that the various partners of the firm pay more attention to the governance mechanisms of these types of companies and, in particular, in countries where foreign investors suffer from weak legal protection (Easterbrook, 1984; Gomes, 2000; La Porta et al., 2000 and Athari et al., 2016). In fact, standardization bodies, the Ministry of Finance, external auditors and stock exchange organizer must focus on sophisticated governance mechanisms to ensure better quality of financial reporting.Originality/valueTo our knowledge, no other research has examined whether the impact of earnings management on dividend policy varies significantly with the moderating effect of certain governance mechanisms in France.

The impact of earnings management on cash holdings of listed firms in Vietnam

Research on the impact of earnings management on corporate cash holdings has yielded inconsistent results. In this research, we investigate the relationship between earnings management and cash holdings of non-financial firms listed on the Vietnamese stock market over the period 2011- 2019. The research results show the negative effect of earnings management on cash holdings, which exists especially for businesses facing high agency costs. This evidence suggests that the negative relationship stems from the adverse impact of earnings management on financial reporting quality. This result is robust to a variety of approaches to deal with the endogenous problems and defects of the model, as well as the use of two different measures of agency cost. An implication from the result is such management increases information asymmetry, which makes it unfit for businesses to keep more cash due to the excessive increase in agency costs. Therefore, the research results have important theoretical contributions and practical implications for both investors and policymakers: earnings management is an important indicator of corporate cash-holding policy.

Analysis of The Effect of Profitability and Liquidity on Income Management Which Impact on Company Value in Soe Banks Registered on Indonesia Stock Exchange Period 2009-2019

This study aims to analyze, test the effect of profitability as measured by Return On Assets, liquidity as measured by LDR on earnings management, and the impact of earnings management on firm value in state-owned tire companies listed on the Indonesia Stock Exchange from 2009 to 2019. Total population This research is 4 state-owned bank companies so that the entire population is sampled with a period of 10 years from 2009-2019. The analysis technique used in this research is panel data regression to obtain a comprehensive picture of the relationship between one variable and another. The results of the research partially show that ROA, LDR Profitability has no effect on Earning Management, Profitability and Liquidity simultaneously have an effect on Earnings Management, and show that earnings management affects Firm Value.

Earnings Management and Cost of Debt of Brazilian Privately Held Companies

We analyzed the relationship between earnings management and the cost of debt using a sample of 3,503 Brazilian privately held companies. In doing so, we discuss the fundamentals of earnings management and the specific economics of privately held companies in Brazil and then hypothesize how these relationships come about. Our proxies for earnings management were modified Jones and modified Jones with ROA (return on assets). We then ran their residuals as explanatory variables for the cost of debt. Our findings point to the importance of earnings quality in privately held companies and the impact of earnings management on the cost of debt, suggesting that the higher the levels of earnings management, the higher the cost of debt, even when controlling by other variables that can influence this relationship. Our findings may also serve to encourage privately held companies to concern themselves with the quality of accounting earnings and inhibit earnings management practices that could increase their cost of debt.

The Impact of Earnings Management and Managerial Ability on Management Compensation

We contribute to the extensive literature on earnings management by examining the impact of earnings management behaviour on executive compensation conditioned on managerial ability. We find that managers with better abilities are associated with more accrual earnings management, less real earnings management, and better mapping of accruals into cash flows. Boards of directors reward this behaviour with better compensation under the perception that accrual earnings management is part of superior managers’ skills and should be incorporated in their reward contracts. The results show that managerial ability is a crucial input for assessing the costs and benefits of executives’ behaviour in their contracts with firms.

Impact of earnings management on agency costs: evidence from MILA markets

PurposeThe purpose of this article is to analyze the effects of accruals-based earnings management (AEM), International Financial Reporting Standard (IFRS) adoption and stock market integration for firms that belong to Latin-American Integrated Market (MILA).Design/methodology/approachThe GMM estimator was used according to Arellano and Bover (1995) for panel data on a sample of 478 non-financial companies between 2000 and 2016. Multilevel mixed models was used for the robustness analysis.FindingsAEM practices significantly and dynamically reduce agency costs. This result suggests companies use positive discretionary accruals to hide true agency costs and avoid shareholders monitoring, while negative discretionary accruals are ways to expropriate wealth and increase agency costs. This result implies that firms use AEM as a predetermined strategy to weaken corporate governance. The IFRS adoption and MILA implementation reduced agency costs. However, only IFRS adoption had the capability to mitigate the effects of AEM on agency costs.Originality/valueThese results reveal AEM constitutes a practice that managers use to weaken firms’ corporate governance and expropriate wealth from shareholders. These practices have effects at short-run and long-run. However, the IFRS adoption and market integration represented by MILA are mitigating factors for agency costs. These results have relevant implications for firms’ corporate governance because they guide investors and shareholders to strengthen corporate control and monitoring on business decision-making. These results also are relevant to policymakers because they orient the financial policies design to strengthen the benefits of IFRS and MILA.

Vice or virtue? The impact of earnings management on bank loan agreements

This study investigates the implications of earnings management on corporate loan pricing. Through two competing hypotheses (smoothing hypothesis and managerial opportunism hypothesis), we find that both accruals and real activities management are associated with higher loan spreads. Banks view earnings management as a value-destroying process that hampers a borrower’s capacity to repay a loan. Therefore, banks demand a marginal increase in loan spread to compensate for future uncertainty and monitoring costs. Furthermore, we examine the cross-sectional effects of lender reputation and lending relationship. Reputable and relationship banks demand even larger spreads for earnings management, consistent with them identifying and viewing earnings management as a risk-increasing activity. Additional analyses on simultaneity, loan contracting fees, covenant restrictiveness, and propensity matching method show consistent results.

Impact of earnings management on bankruptcy prediction

Research background: Managers of the companies intentionally manipulate business earnings to achieve the required status of the company. Earnings management is a legal and widely preferred phenomenon of business finance that financial managers use to maintain and improve the company´s competitiveness. The consequence of these activities is to provide a positive view for the owners, encourage the profitability for the creditor and the investors as well as demonstrate economic strengths to competitors. Consequently, these activities lead to the modification of financial statements of the companies, which have a direct impact on the prediction ability of bankruptcy models. Purpose of the article: The main goal of the paper is to point out the impact of earnings management in the companies on the possibility and ability of bankruptcy prediction. There is a correlation between application of earnings management in companies followed by changes in financial statements of the companies. Therefore, the ability of bankruptcy prediction models to predict possible financial problems of the company is questionable. Methods: The paper presents the connection of earnings management and its impact on bankruptcy prediction based on the bibliometric overview and deep literature review. Findings & Value added: The paper presents results, connections and impact of earnings management on bankruptcy prediction.

Earnings Management, Enterprise Scale and Enterprise Value—Research Based on Data and Statistical Analysis Tools

This paper takes China’s A-share listed companies in Shanghai and Shenzhen Stock Exchange from 2012 to 2016 as samples to analyze the impact of earnings management on current and subsequent enterprise value. It is found that real earnings management not only affects the current value, but also damages the long-term value of enterprises continuously. Further research finds that the size of the firm has a moderating effect, that is, the larger the size of the firm, the damage effect of real earnings management on the firm value is mitigated.