Measures Of Earnings Management Research Articles

The Impact of Earnings Management Practices on the Market Value of Industrial Companies Listed on the Amman Stock Exchange: Evidence from Jordan

Reported earnings and their prediction is one of the most important factors that are relied upon in determining the value of various investments, given that the higher the earnings, the greater the possibility of distributing profits, and accordingly, stock prices are determined in the financial markets. This study aims to examine the impact of earnings management on the firm value of Jordanian industrial companies listed on the Amman Stock Exchange for 2015-2019. This study used discretionary accruals according to the modified Jones model to measure earnings management. Tobin’s Q as well is used as a proxy to firm value. Furthermore, this study used firm size, firm age, and leverage as control variables. In analyzing data, STATA is used. The results showed that earnings management has a negative but insignificant impact on firm value. On the other hand, leverage has a significant and negative effect on firm value. Firm age has a positive but insignificant effect on firm value. Firm size has a negative and significant effect on firm value.

Predictors of revenue shifting and expense shifting: Evidence from an emerging economy

Prior literature established that managers engage in Revenue Shifting (RS) and Expense Shifting (ES) with an intent to report favourable operating performance; our paper extends such research in a new direction by investigating both forms based on the need, ease, and advantage of each form of shifting strategy. The study identifies firm-specific factors that incentivize firms to prefer RS over ES and vice-versa. We undertake a longitudinal study (2001–2019) using a sample size of 39,634 firm-years, enlisted in the Bombay Stock Exchange (BSE). Our results show that peer-performance, size, financial leverage, growth opportunities, accounting flexibility, and age of the firm are important determinants of RS and ES. Specifically, our results exhibit that large, levered, old, and high-growth firms are engaged in RS, whereas small, young, firms with lesser accounting flexibility, and firms operating below peer-performance are involved in ES. These results are robust to controlling for accruals earnings management, real earnings management, endogeneity, self-selection bias, and alternative measures of RS and ES. Our findings are helpful to auditors and investors in improving awareness of forms of classification shifting.

The impact of debt, taxation and financial crisis on earnings management: the case of Greece

PurposeThe purpose of this study is to empirically investigate the Greek firms' earnings management policies compared with debt, taxation and the financial crisis.Design/methodology/approachIn this paper, the authors show that existed measures of real earnings management, whether corrected for performance or not, rely crucially on strong assumptions. The authors provide a novel modelling that permits panel structure so as to correct for heterogeneity across firms while permitting to determine endogenously the number of underlying firm-groups in the data generating process.FindingsThe empirical results indicate that Greek firms are likely to reduce earnings manipulation activities when they face liquidity risk. Taxation and financial crisis have a negative and positive effect on earnings management, respectively.Originality/valueThe effect of debt, taxation and financial crisis on earnings management has never been investigated in Greece. The empirical results offer valuable information to shareholders and investors as they can understand how some main factors, such as debt, taxation and financial crisis, influence firm's accounting practices.

Earnings Management: An Analysis of Corporate Strategy, Financial Performance, and Audit Quality

This study aims to examine the effect of corporate strategy on earnings management with financial performance and audit quality as moderating variables. This study adopts the concept proposed by Miles and Snow in determining company strategy. The proxies for business strategy are the number of employees to total sales (EMPSAL), the capital expenditure ratio to total assets (CAPTA), and the dividend payout ratio (DPR). Financial performance is proxied by return on assets (ROA), auditor size measures audit quality, and discretionary accruals measure earnings management. The sample was determined using a purposive sampling method, and a sample of 16 companies was obtained with 80 observations. Companies grouped by prospector and defender strategies were analyzed using cluster analysis. Data analysis was carried out using moderated regression analysis (MRA). The results shows that a company's strategy affects earnings management, and that firm performance and auditor quality can moderate the relationship between corporate strategy and earnings management.

Sustainable Development of Chinese Family Firms: A Perspective from Downward Earnings Management before Successions

Most initial entrepreneurs of Chinese family firms are approaching retirement, and intra-family successions have occurred frequently in recent years. However, both founders and the public have concerns about successors’ ability of assuming the responsibility of long-term sustainable development of their family business. This paper aims to explore whether and how founders manage earnings before within-family successions for the purpose of smooth successions. Based on a sample of Chinese family firms from 2004 to 2018 and using the ordinary least square (OLS) regression method, this study finds that Chinese family firm founders tend to manage earnings downward in the year before they transfer business to their heirs. Furthermore, founders with poverty experiences and political connections have more incentives to manipulate earnings downward. Firms’ institutional investors and the legal environment inhibit founders’ earnings management behavior before within-family successions, but independent directors do not have any significant impact on the association between successions and earnings management. Finally, it is documented that the downward earnings management leads to more favorable market reactions in the short term but do harm to firms’ long-term sustainable development. The results are robust to the Heckman two-stage analysis and using the alternative measures of earnings management. This study contributes to research on family firm succession and earnings management, and is also informative to policy makers, market participants, and family firm founders.

EARNINGS MANAGEMENT DI INDONESIA: SEBUAH STUDI LITERATUR

This study describes the evolution of earnings management research in Indonesia taken from journals studied in Indonesia and indexed with sinta 1-3 with the research year 2018-2021. The purpose of research is to add and develop research or articles on earnings management contained in journals in Indonesia. The sample was obtained as many as 23 articles. The research categorizes articles based on research years, research variables, research analysis methods, research theory, research types, research sectors, and research models contained in the articles. The research method used is a systematic literature review. From this literary study, we can conclude that research related to earnings management have decreased in the year 2021, the commonly used variable is leverage, the research method mostly used is multiple linear regression, generally used theory is agency theory, type of earnings management study normally used is quantitative, manufacture sector is often used research sector, and modified jones model by DeChow et al. is commonly used for measuring earnings management.

EARNING MANAGEMENT: PHENOMENONS YOU CANNOT AVOID

Earning management is a phenomenon that is difficult to avoid because it was the effect of accrual basis usage in the preparation of financial statements. The accrual basis is agreed upon as the basis for preparing financial statements because the accrual basis is indeed more rational and fair compared to the cash basis. Conflicts of interest are increasing, especially because the principal cannot monitor daily management activities to ensure that management works in accordance with shareholders' wishes. The objective of this research is to measure earnings management in 78 companies in Indonesia that have conducted an IPO in 2008-2019. Earnings management is measured to determine the behavior of managers by utilizing earnings management when going to conduct an IPO. We collect secondary data provided by the IDX and the research sample is private companies and SOEs that conduct IPOs on the Indonesia Stock Exchange (BEI) from 2008 to 2013. The results of this study reveal that the calculation of earnings management with measurement methods Discretionary Accrual (DA) in 78 companies that have conducted an IPO has a minimum DA value of -384.41 and a maximum DA value of 27.04. The results of the one-sample t-test test statistically show a significance value below 5%, this shows that 78 companies tend to do earnings management before conducting an IPO

Market competition and earnings management: Evidence from Vietnam

With a panel data of 596 non-financial firms and 4,988 firm-year observations, the paper examines the relation between product market competition and earnings management in Vietnamese listed firms on Ha Noi and Ho Chi Minh stock exchanges during the period 2008–2014. The empirical results show that market competition is negatively correlated with earnings management. This means firms operating in highly competitive market have low level of earnings management. It could be that intensified market competition works as an external disciplinary governance mechanism or it makes corporate misreporting more costly by increasing firms’ exposure to predation risk so as to curtail managers’ opportunistic behavior in these firms. The results are robust with respect to alternative measures of market competition and earnings management.

The Effect of Board Characteristics on Earnings Management in Differently-Sized European Firms

The effectiveness and the monitoring potentials of the board are crucial parameters for the management in the decision-making process. This study investigates the effect of board characteristics on the level of earnings management in EU listed firms. The findings indicate that the oversized boards function as a restricting determinant to the level of real and accrual-based manipulations. Also, the average board tenure is negatively correlated with real earnings management measures. An additional research query of this research is whether the effect of the board characteristics is diverse in different sized firms. In smaller firms, the board size impacts the accrual-based measures positively, while in the bigger firms, there is a positive association only with real earnings management measures. Furthermore, in smaller firms, an increase in board tenure seems to facilitate the manipulations using accounting policies and limit the manipulations of real activities. Finally, the results demonstrate that CEO-chairman duality is negatively related to the level of real earnings management.

Earnings Management and Company Characteristics: Empirical Evidence from Algerian Companies

Abstract This paper attempts to analyze the impact of some Algerian companies’ characteristics (size, activity sector, property, listing, and nature of financial statements) on the level of earnings management. The research employed 117 observations for 26 Algerian companies from 2016 to 2020 and used a multiple linear regression model and discretionary accounting accruals to measure earnings management. According to the findings, earnings management in Algeria is explained by the companies’ sizes, activity sectors, and stock market listing. However, the nature of financial statements and the ownership of the companies do not affect earnings management. These results are beneficial for regulators and auditors since they provide empirical evidence about the characteristics of companies that manipulate earnings. Consequently, they can enable them to take appropriate actions to enhance the quality of financial reports, whether when developing and reviewing accounting standards by regulators or when examining financial information by auditors.

Effect of Ownership Structure on Earnings Management in Listed Manufacturing Firms at Nairobi Securities Exchange, Kenya

A firm's ownership structure is important to the effectiveness of monitoring the mechanisms used to manipulate earnings. Based on the ownership structure of a firm, management can feel pressure to manage earnings by manipulating the company's accounting practices to meet financial expectations. This paper focuses on how the three components of ownership structure affect earnings management of listed firms. That is to determine the effect of ownership concentration, managerial ownership, and institutional ownership on earnings management of listed firms. As per the jones and modified Jones model, discretionary accruals were used as a measure of earnings management. how did you measure the components of ownership structure The study deployed random effects model and STATA software for data analysis. Data was collected for the period from 2011 to 2019 from all listed manufacturing firms in Nairobi securities exchange. The study findings established that managerial ownership, institutional ownership and ownership concentration have an insignificant effect on earnings management. The study indicated that while majority shareholders are keen to closely monitor the management to ensure that their interests are well protected, this can only be attained if they have requisite skills, knowledge, and experience. The study also indicated that most pertinent is to have strong internal controls in place that seals all possible loopholes that could be exploited by the management to manipulate earnings. The study considered two control variables, firm size and growth which were also found to have an insignificant effect on earnings management.

Environmental, social and governance performance and earnings management – The moderating role of law code and creditor's rights

This study examines whether environmental, social, and governance (ESG) engagement affects firms’ earnings management (EM) behavior in a multicountry set up. Employing the Tobit and panel regression framework and co`nsidering performance-matched measure of EM, we show that ESG performance substantially reduces opportunistic firms’ EM behavior. Moreover, the civil law code and superior credit rights negatively moderate the ESG–EM relationship. Empirical findings are robust and survive the use of alternative methodology and endogeneity test.

Impact of real earnings management on earnings persistence – evidence from India

PurposeThe present study aims to examine the relationship between real earnings management and earnings persistence and also to test how the group affiliation of the firms influences this relationship.Design/methodology/approachThe study draws the sample of listed non-financial firms in the Indian market from the year 2011 to 2018 and applies panel least squares regression with industry and year fixed effects. Future performance of a firm is measured by one year leading value of return on assets. The interaction term of real earnings management and return on assets is used to measure the impact of real earnings management on earnings persistence. The firm-specific controlling variables are also included in the empirical model. The robustness of the results is tested by sub-dividing the sample into group affiliated and non-group affiliated firms.FindingsThe findings of the study reveal that opportunistic earnings management has a significant impact on earnings persistence when real earnings management is measured through abnormal increase in operating cash flows and abnormal reduction in discretionary expenditure. On the other hand, signalling earnings management has a significant impact on earnings persistence when real earnings management is measured through abnormal increase in the level of production. The results also reveal that REM has more negative implications on group affiliated firms compared to non-group affiliated firms supporting the theory of entrenchment effect.Originality/valueThis is the first study in the Indian context which tests the implications of real earnings management on earnings persistence by using three alternative measures of real earnings management. The study contributes to the existing literature on the implications of real earnings management in emerging markets like India.

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.

Should I Trust You? Bidder’s Earnings Quality as an Indicator of Trustworthiness in Earnout Agreements

Synopsis The research problem This paper aims to test whether an acquirer’s past earnings quality (proxied by the level of earnings management) serves as an indicator of its trustworthiness in view of the inclusion of an earnout agreement in an acquisition contract. Motivation Prior studies highlighted the benefits of earnout agreements, showing that they help reduce adverse selection problems and valuation risk faced by the acquirers. However, not much attention has been paid to the risks that these contracts entail. The majority of earnouts are based on accounting performance measures, which may be subject to earnings management by the acquirer to reduce, or even avoid, contingent payments. Therefore, the decision to include an earnout in an acquisition may depend on the sellers’ perceived probability that the acquirer will use opportunistic tactics to avoid the contingent payment, as indicated by the acquirer’s past behavior. The test hypotheses H1: The likelihood of inclusion of earnouts in acquisition deals is negatively associated with the level of earnings management in the acquirer’s past financial statements. H2: The relation between earnings management and the use of earnouts is stronger when the bidder has no acquisition track record. Target population M&A advisors, financial analysts, stakeholders of companies engaging in M&A deals. Adopted methodology Logit regressions, propensity score matching analyses for robustness. Analyses Using a sample of 8,968 acquisition deals completed by US listed companies between 2002 and 2014, we examine the association between the use of earnouts and bidder’s earnings quality (proxied by the level of earnings management) controlling for the determinants of the use of earnouts described by previous literature. We collected acquisitions data from Thomson ONE Banker and accounting information from Compustat. Using logit models, we regress the choice to include an earnout in an M&A deal on several earnings management proxies and on the interaction between the latter variables and bidder’s acquisition track record. Findings We find robust evidence that the level of the acquirer’s past earnings management is negatively associated to the probability of inclusion of an earnout in acquisition contracts. This association is stronger if the bidder has no prior acquisition history and is robust to various measures of earnings management and to controls for other external monitoring mechanisms.

Female Leaders and Earnings Management: An Exploration of Chief Positions

Female leader affects earnings management and the quality of the financial report. This study wants to investigate the effect of female leaders on real earnings management. We use the nine chief positions with a female presence as a leader. The data were obtained from Indonesia's public listed company on the S&P Global Market Intelligence database from 2012-2020. For real earnings management measures, we used data two years earlier. The data sample selected was 3.420 firm-year observations. The sample was separated into 12 classifications, according to IDX Industrial Classifications. Female leader positions as chief executive, chief accounting, and chief administration negatively affect real earnings management. While female leader positions as chief technology and chief marketing have a positive effect on real earnings management. We find that industrial has a different effect on real earnings management. Many studies are predicting female chief leaders and real earnings management. The most significant finding is female roles as finance managers. However, no research predicts real earning management using female leaders in various chief positions.

The impact of gender-diverse board and institutional investors on accruals management

Institutional investors are large proponents of increasing gender diversity on firms’ boards. However, it is an open question whether firms with institutional investors who favor monitoring, benefit from increasing the diversity of their boards. The objective of this paper is to investigate this issue by analyzing how the presence of institutional investors who favor monitoring, and a gender-diverse board, impact one aspect of governance, i.e., firms’ earnings management. In our empirical investigation, we perform fixed-effect panel regressions on a sample of 5668​ firm-years over the period 2007 to 2014. Building on the literature that finds that independent institutional investors with long-term investment and concentrated ownership (ILTICO) are more likely to favor monitoring, we first confirm that both and ILTICO and board gender diversity reduce abnormal accruals, our measure of earnings management. In particular, we confirm a significant negative relation between each of these strong governance mechanisms and the level of abnormal accruals. However, we provide robust evidence that the combined effect of a gender-diverse board and ILTICO is an increase in accruals-based earnings management. By further investigating the combined effect using a GMM model, we attribute the increase in earnings management to the fact that these two governance mechanisms are substitutes. In other words, they do not constitute an efficient bundle. The results are robust after controlling for holdings, board, CEO, auditor and financial characteristics; using different models of abnormal accruals; and using alternative definitions of board gender diversity. Our results highlight the need to consider whether governance factors are complements or substitutes when combining them.

Does Corporate Governance and other Factors Influence Earnings Management? A Study on Indonesia’s Banking Sector

The issue of misreporting financial data and earnings management has become more prominent in recent years. Several studies have been conducted determining the influences of the mechanisms of corporate governance and earnings management in various countries. In this study, it was proven that the existence of a good corporate governance (GCG) mechanism did not suppress earnings management practices in the banking sector industry in Indonesia. However, another factor, dividend policy, can prove effective in suppressing earnings management. The measurement of earnings management in this study was carried out using the Modified Jones model with a population of 43 conventional banks from which research data were taken using a purposive sampling technique sourced from the Indonesia Stock Exchange (IDX). The analysis was carried out using multiple linear regression. The implication of this research is that the implementation of good corporate governance by an entity must be considered given that earnings management practices in Indonesia are still relatively high.

Telaah Konseptual atas Berbagai Model Pengukuran Earnings Management: Edisi Revisi

As explained by Healy and Wahlen (1999), earnings management occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying outcomes that depend on reported accounting numbers or to influence contractual outcomes that depend on reported accounting numbers’.  Several accounting researchers have proposed models for detecting the earnings management, e.g, Healy model (1985), De Angelo model (1986), Jones model (1991), Industry model (1991), Modified Jones Model (1995), Dechow & Dichev model (2002), Kothari Model (2005), Classification Shifting Model (McVay, 2006), Stubben Model (2010), the new approach model (2011), etc.  This study aims to evaluate those of earnings management models, which is the most accurate in measuring earnings management.  After comparing those earnings management models, this study concludes that the new approach model is able to overcome the weaknesses in other models, thus, so far it is the most accurate model in measuring the earnings management.

Telaah Konseptual atas Berbagai Model Pengukuran Earnings Management: Edisi Revisi

As explained by Healy and Wahlen (1999), earnings management occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying outcomes that depend on reported accounting numbers or to influence contractual outcomes that depend on reported accounting numbers’.  Several accounting researchers have proposed models for detecting the earnings management, e.g, Healy model (1985), De Angelo model (1986), Jones model (1991), Industry model (1991), Modified Jones Model (1995), Dechow & Dichev model (2002), Kothari Model (2005), Classification Shifting Model (McVay, 2006), Stubben Model (2010), the new approach model (2011), etc.  This study aims to evaluate those of earnings management models, which is the most accurate in measuring earnings management.  After comparing those earnings management models, this study concludes that the new approach model is able to overcome the weaknesses in other models, thus, so far it is the most accurate model in measuring the earnings management.