Income-decreasing Accruals Research Articles

The effect of the COVID-19 pandemic on accrual-based earnings management: Evidence from four most affected European countries

This study aims to investigate the effect of the COVID-19 pandemic on accrual-based earnings management (EM) based upon a sampling of 938 listed firms from four selected European countries (United Kingdom, Italy, Spain, and Türkiye) during 2016–2020. We find that firms engage more in accrual-based EM through income-increasing and income-decreasing accruals in the year of the COVID-19 pandemic relative to the period before the pandemic. These findings imply that financial reporting reliability and usefulness decreased in the period of the pandemic. Our results are robust to some sensitivity checks.

Futures, provisional sales, and earnings management in the global gold mining industry

This study investigates the impact of futures on earnings management in the gold mining industry. Using quarterly data from a global sample of gold firms between 2003 and 2019, we find evidence of income-increasing accruals and real earnings management during contango periods (when futures price exceed the current spot price). Conversely, gold firms use income-decreasing accruals and real earnings management during backwardation periods (when the current spot price exceeds the futures price). This study contributes to the literature with evidence on futures as determinants of earnings management, as well as on the process through which managers smooth earnings.

Audit partner tenure and earnings management: evidence from Vietnam

Purpose This study aims to examine the relationship between audit partner tenure and earnings management of companies listed on Vietnamese stock exchanges. Design/methodology/approach This study uses a sample of 1,363 observations from 2016 to 2019. This study manually collects data on audit partner tenure. Using Datastream financial data, this study calculates abnormal accruals using the modified-Jones models (Jones, 1991; Dechow et al., 1995; Kothari et al., 2005), which are used as the proxy for earnings management. This study runs Ordinary Least Squares regressions to test this study’s hypothesis. Findings The results show that audit partner tenure is positively related to abnormal accruals. Cross-sectional analyses indicate that the relationship between audit partner tenure and abnormal accruals is more pronounced for firms that are audited by non-Big Four auditors and for firms that have chief executive officer-chairperson duality, suggesting that weak corporate governance is a channel for the established relationship. The evidence also shows that audit partner tenure is negatively associated with the magnitude of income-decreasing accruals but has no relationship with income-increasing accruals. This study’s findings are robust for several tests, including using the propensity score matching approach. Originality/value To the best of the authors’ knowledge, this study is the first to provide evidence of the relationship between audit partner tenure and earnings management in Vietnam.

Earnings management to avoid earnings boosts

PurposeThe purpose of this study is to investigate whether earnings boosts before the year end trigger earnings management. It examines whether firms that substantially outperformed their last year earnings during the first three quarters push their earnings down to avoid reporting earnings boosts.Design/methodology/approachRegression analysis is used to compare earnings management of firms with earnings boosts and other firms.FindingsThe results indicate that firms outperforming their last year results by the end of the third quarter manipulate their earnings downwards by means of real activities manipulation, while they do not indicate income-decreasing accruals management. It is also found that consistent with the prominent shift from accruals management to real activities manipulation, accruals management is less costly which justifies why it is used for downward manipulation.Research limitations/implicationsThe results are limited to one single earnings benchmark i.e. last year earnings. Further research may individually or collectively examine other benchmarks including analysts' forecasts.Practical implicationsThe findings suggest that users should be more vigilant of firms exceeding their last year interim results, as they could be involved in downward earnings management.Originality/valueThis study documents earnings management in a new setting where earnings boosts before the year end trigger downward manipulation of real activities.

Accrual earnings management in response to an oil price shock

The aim of this study was to examine the relationship between the oil price shock of 2014 and earnings management of oil companies listed on the Oslo Stock Exchange. The results revealed a significant increase in earnings management following the oil price drop. Moreover, we found that companies adjusted their earnings and abnormal income-decreasing accruals were identified during the third and fourth quarters of 2014. We attribute this finding to the big bath strategy. The contribution of this study promotes the understanding of the effect of macroeconomic shocks on earnings management behaviour, and it supplements and expands the earnings management literature in this homogenous industry.

The Moderating Effect of OPEC and Non-OPEC on the Relationship Between Oil Price Volatility and Accrual Earnings Management in the Oil and Gas Industry

This study is an empirical examination on the relationship between oil price volatility and earnings management in the oil and gas industry, moderated by price-setting abilities of OPEC (Organization of Petroleum Exporting Nations) and price taking abilities of Non-OPEC countries. This study tests discretionary, income-decreasing, current and non-current accruals as a proxy of earnings management. A total sample of 209 firm-year observations from 2008 to 2018 of listed oil and gas firm is collected from the Thomson Datastream database. To incorporate the moderation effect, the samples were divided into two sub-groups, OPEC and Non-OPEC using reserve to production ratio. Firm attributes are included in the analysis as the constant variable such as leverage, current ratio, EBITDA and Growth. The initial results show that, overall, the interaction effect between OPEC/Non-OPEC and oil price volatility is positive and significant to discretionary and income-decreasing accruals. Data samples are limited while comparing OPEC and Non-OPEC countries as not every oil and gas company in OPEC are listed companies and their information is heavily protected. This study contributes to extant earnings management literature regarding political cost, which remains a significant concern to oil and gas companies worldwide.

Local soldier fatalities and war profiteers: New tests of the political cost hypothesis

We test the political cost hypothesis using local soldier fatalities as a source of as-if-random variation in the threat of political costs for local defense firms. Soldier fatalities vary the threat of political costs for defense firms because the U.S. tradition of shared sacrifice during war vulgarizes war profits amid dead soldiers. Local defense firms record more income-decreasing accruals, equal to 1.17 percent of total assets, in response to a one standard deviation increase in local soldier fatalities (an additional 29 soldier fatalities in the average state-year). A wide variety of robustness tests corroborate our inferences.

Individual Blockholder's Influence on Accounting Quality: Evidence from Korea

This study investigates the influence of individual blockholder on accounting quality. Prior studies investigating Korean blockholders' influence focus on the influence of controlling shareholders or institutional investors; however, they rarely examine individual blockholders’ influence. This paper investigates how individual blockholders in Korean stock markets affect accounting quality of firms listed in Korean Stock Exchange. I analyze individual blockholders' influence on proxies of accounting quality using multivariate regression with hand-collected individual blockholder data. Korean law requires public firms to disclose the list of shareholders having no less than 5% of ownership. From the list of blockholders, individuals who have no explicit personal relation with controlling shareholders were classified as individual blockholders. My empirical results show that firms having individual blockholder(s) use more income-decreasing accruals than those having no individual blockholder. Furthermore, accounting information of firms having individual blockholders(s) is more conservative than that of firms having no individual blockholders. However, the presence of individual blockholder increases the tendency of loss avoidance and earnings management using overproduction and reduction of discretionary expenditure. This paper contributes to the literature by presenting the first evidence of the monitoring role of an individual blockholder on financial reporting of firms listed in the Korean stock markets.

Keputusan Pemilihan Strategi Manajemen Laba Pada Perusahaan Yang Mengalami Financial Distress di Indonesia

This study discusses real earnings management and classification shifting along with accrual earnings management as an alternative strategy for companies that experience financial distress, and differences in choices of strategies at each stage of financial distress. This research was conducted on all manufacturing companies which experienced financial distress among those listed on the Indonesian Stock Exchange for six years from 2012 to 2017. Purposive sampling was used to collect data from all the manufacturing sector companies listed on the IDX that experienced financial distress. The sample companies totaled to 43 with a total of 258 observation data. The multiple linear regression technique was used in data analysis, analysis aided by SPSS. The results of this study indicate that in the early stages of financial distress, companies tend to choose the real earnings management strategy in the form of decreased production and classification shifting. While in the later stages the chosen strategy is real earnings management through a reduction in selling, general and administrative expenses. Finally at extreme stage, companies tend to adopt income-decreasing accruals strategies
 Keywords: Financial distress, accrual earnings management, real earnings management, classification shifting

ANALISIS MANAJEMEN LABA DAN KINERJA KEUANGAN PERUSAHAAN PENGAKUISISI SEBELUM DAN SESUDAH AKUISISI

This study discuss about earnings management and financial performance of the acquirer before and after acquisition. The purpose of research was to obtain empirical evidence of how earning management have done by acquirer companies before the implementation of acquisition. In addition it aims to determine the changes in the acquirer’s financial performance before and after the acquisition. This research is a comparative study which to compare the financial performance the acquirer before and after the company make acquisition. Analysis of financial performance uses financial rations, including profitability, activity, and solvability. Analysis of earnings management using the theory of Jones modified. Earnings management by the acquirer is a proxy for discretionary accruals (DA). The company performance was measured by using financing rations (a net profit margin, return on assets, total assets turnover, and debt to equity ratio). The result of analysis showed that there are two companies which have positive discretionary accrual value and the other three companies which have negative discretionary accrual value. Moreover financial performance of the acquirer company is experiencing the different more toward to reduction of financial performance. The conclusion was that earning management of two acquirer companies (ANTM and UNTR) have done by increasing the profit (income increasing accruals) before doing the acquisition. While, the other three companies (ENRG, RAJA, and SMGR) have done earning management by decreasing the profit (income decreasing accruals) before doing the acquisition. Furthermore, financial performance that measure with NPM and DER increased after acquisition, while ROA and TATO decreased after acquisition.

Women directors, family ownership and earnings management in Malaysia

PurposeThe purpose of this paper is to determine whether the representation of women on the boards (WOMBDs) and audit committees is associated with a reduction in the practice of earnings management and whether women are associated with income reducing (conservative) rather than income-increasing (aggressive) earnings management. The authors further argue that family ownership moderates the relationship between the presence of WOMBDs and audit committees and earnings management.Design/methodology/approachThe study uses non-finance firms listed on Bursa Malaysia over a period of four years, i.e. from 2008 until 2011.FindingsThe evidence reveals that the presence of WOMBD or audit committee is not associated with a propensity for earnings management. In addition, the evidence also reveals that family ownership does not interact either with WOMBD or with women on the audit committee (WOMAC) to influence the propensity for earnings management. Nevertheless, the additional analyses show that, while women on boards are not associated with income-decreasing accruals, the presence of women on audit committees leads to income-reducing earnings management. The evidence further reveals that family ownership does not interact with either WOMBD or WOMAC to influence income-decreasing earnings management.Originality/valueThis study extends prior research on the role of women directors and women audit committee members on earnings management focussing on family ownership. Further, the study also examines the direction of earnings management as opposed to the most prior studies, which mainly focus on the propensity of earnings management.

Les dirigeants gèrent-ils les résultats comptables avant d’annoncer une réduction d’effectifs ? Le cas des entreprises françaises cotées

Cet article vise à observer si les dirigeants adoptent un comportement de gestion des résultats (GR) dans le contexte des réductions d’effectifs. Nous supposons une GR à la baisse avant l’annonce de l’opération afin de montrer son caractère nécessaire et limiter ainsi la survenance de coûts politiques. L’étude empirique est conduite sur un échantillon de 120 annonces de réduction d’effectifs réalisées par 104 entreprises cotées françaises entre 2007 et 2012. Les résultats confirment une GR à la baisse d’environ 4 % du total actif des entreprises. De manière globale, cette étude permet de valider l’hypothèse des coûts politiques dans le contexte des réductions d’effectifs.

The Effect of Financial and Eurozone Crisis on Accounting Quality of the Hospitality Sector

This study examined the evolution of accounting quality in the Mauritian hospitality industry from 1999–2014 using accruals quality as a proxy for accounting quality. This study also determined whether the financial and Eurozone crisis affected accounting quality of the Mauritian hospitality firms. It has been observed that the accounting quality of the hospitality industry in Mauritius was very poor during the crisis period of 2009–2011. Hospitality firms in Mauritius might have used income-decreasing accruals during the crisis period and engaged in “big bath” practices; however, the poor accounting quality in the hospitality industry might have been due to real poor economic performance rather than big bath practices during the crisis period.

The earnings management opportunity for US oil and gas firms during the 2011 Arab Spring event

Purpose – This study aims to examine whether US oil and gas companies engaged in earnings management during the 2011 Arab Spring, which resulted in significant increases in both crude oil and gasoline prices. Design/methodology/approach – Following a similar research methodology from prior research, this study tests the existence of earnings management based on discretionary total accruals, current accruals and non-current accruals to determine whether both large petroleum refining firms and relatively small oil and gas-producing firms, jointly and separately, lowered reported earnings. Findings – The results show that, overall, US oil and gas companies as a group engaged in income-decreasing earnings management during the Arab Spring. The results seem to support the political cost hypothesis. However, further analyses indicate that the results are driven by abnormal income-decreasing accruals of the relatively small oil and gas-producing firms, which are politically less sensitive. Research limitations/implications – The findings suggest that there may be other non-political cost incentives, such as income smoothing, for the relatively small oil and gas-producing firms managing earnings downward during periods of large oil price increases. However, the possibility for firms with reversals of income-increasing activity from other quarters is not ruled out. Originality/value – This study not only is the first empirical study of earnings management by oil and gas companies during the Arab Spring, but also contributes to extant earnings management literature regarding political cost hypothesis, which still remains a major concern for US oil and gas companies.

Healthcare Reform Proposal and the Behavior of Pharmaceutical Companies: The Role of Political Costs

SYNOPSIS This study examines whether drug makers took political and earnings management actions in response to the 2008 presidential campaign, which proposed major healthcare reforms. Specifically, we draw from the political cost theory and examine whether the level of political spending and the behavior of abnormal accruals and discretionary expense items in 2008 are consistent with a strategy by the drug makers to avert or reduce the adverse effect of any such reforms. A supplementary analysis considers whether the firms differ in their responses to the proposed reforms as a function of their exposure to the expected wave of patent expirations and preexisting market conditions. In particular, we examine a subset of pharmaceutical firms with elevated exposure to patent expirations or with severe market valuation problems and test the proposition that such firms will be less inclined to manage earnings downward for fear of a greater stock market penalty. We document above average increases in political spending and abnormal decreases in discretionary accruals for the drug firms in 2008; however, the subset of firms with elevated exposure to the patent expirations or with underperforming stocks had significantly smaller income-decreasing accruals during the same period. These latter results demonstrate the increased sensitivity of the subsets of firms to the capital market costs associated with managing earnings downward. Data Availability: Data are available from sources identified in the paper.

The Effect of Abnormal Accrual on Future Audit Tenure

Increase the auditor independence issue leads to increase the importance of audit rotation phenomenon in accounting researches. Auditors change almost lead to decrease the confidence of investors about reliability of financial statements, special if audit change include negative signals, bad news and doubt about new auditors. Auditors change can be either discretionary or mandatory. If the quality of financial reporting is not suitable, auditors terminate the audit engagement. Otherwise if auditor disagree with owner about current accounting principles and standards, owner change the auditor. So, the main goal of current research is to investigate the effect of abnormal accrual on life expectancy of audit engagements. The population of research is all listed firms in Tehran stock exchange. Finally a sample of 100 listed firms was chosen by systematic method. Time-period of research is from 20042011. Logit multiple regression was utilized to test hypotheses. Statistical methods used consist of Hausmar-Lamshu statistic, adjusted R square and t- statistic. Finding indicates that income-decreasing accruals decrease the life expectancy of audit engagement. Findings also indicate that income-decreasing accruals decrease the life expectancy of audit engagement. In other words, by increasing the level of income-increasing accrual and income-decreasing accrual the probability of terminating the audit engagement and dismissal the auditor increase too and lead to decreasing the future tenure.

The Effect Of Book-Tax Conformity On The Use Of Accruals: Evidence From Korea

<p>This study in the Korean context investigates the effect of book-tax conformity on the use of accruals. In a sample of 4,331 Korean firms, we divide total accruals into book-tax accruals and book-only accruals. Book-tax accruals are defined as those that affect both taxable income and reported earnings. Book-only accruals are defined as those that affect only reported earnings and are unrelated to taxable income. We anticipate that managers will decrease taxable income by recording book-tax accruals that conform relatively closely to taxable income in order to reduce their tax liability. They are expected to attempt to increase book income through book-only accruals. We also examine the market response to firms that use these two types of accruals in different ways. Our evidence demonstrates increased use of income-decreasing book-tax accruals to decrease taxable income and increased use of book-only accruals to increase financial income. Use of book-only accruals also compensates for potential costs unrelated to tax, such as financial reporting costs. In addition, our results show that the market correctly assesses the management of accruals even when the uses of book-tax and book-only accruals offset each other.</p>

Does European Union policy making explain accounting choices? An empirical analysis of the effects of investigations by the Directorate General for Competition on accounting choices

The hypothesis that political costs caused by the regulatory process impact upon accounting has been tested extensively and has found considerable empirical support. However, most studies use data from the United States. Whether the conclusions carry over to different institutional settings is an open question. This study exploits the fact that, in the European Union, there exists a policy area—competition policy—in which the European Commission can act in a manner significantly less constrained than in most other policy areas, imposing substantial fines on companies found to be in infringement of European competition regulations. Companies investigated by the Commission’s Directorate General for Competition have strong incentives to deflect attention and keep a low profile. It is conjectured that such companies will use income-decreasing accruals in order not to appear to be making unjustified profits. The results confirm this conjecture.

The Tradeoffs between Tax Savings and Financial Reporting Costs: Public versus Private Firms in China

This study examines how public and private firms responded to the 2008 tax rate reduction in China from 33 percent to 25 percent. We find that private firms report significantly more income-decreasing accruals than public firms in 2007, prior to the tax rate reduction. These negative accruals are substantial and material both compared to public firms and compared to 2008. Private firms appeared to shift RMB 8 million in the aggregate, or 22 percent of total income. The results provide the first economy-wide estimates of the extent to which private firms respond materially to rate changes with inter-temporal income-shifting.

Macroeconomic control, political costs and earnings management: Evidence from Chinese listed real estate companies

Firms in China have faced high political costs during China’s economic transition, because they are affected by macroeconomic policies. However, research to date has offered no consistent conclusions on the relationship between political costs and earnings management in China. This study tests whether real estate firms attempt to decrease earnings during periods of macroeconomic control, using variables related to the national real estate market as proxies for political costs. We find that political costs are negatively related to earnings management in listed real estate firms. In addition, we find that non-state-owned enterprises utilized more income-decreasing accruals during this period. Our results are consistent with the political costs hypothesis.