Opportunistic Earnings Management Research Articles

Sentiment and Accruals Earnings Management: Does Governance and Regulatory Environment Matter?

This paper examines the implications of firm-level governance mechanisms and the regulatory environment on the relationship between investor sentiment and accrual-based earnings management. Our findings confirm the positive impact of sentiment on earnings management through accruals. Our results confirm that in the presence of a stringent regulatory environment, the likelihood of abnormal accruals following a positive sentiment environment is low. We document that a stringent regulatory environment reduces the likelihood of abnormal accruals following a positive sentiment environment. Results further confirm that improved governance characteristics like larger board, increased board independence, and stringent related party transaction norms help to monitor corporate behaviour and mitigates opportunistic earnings management activity of managers with an exogeneous effect of market sentiment. Thus, our results have important implications for regulators and policymakers for strengthening the regulatory and monitoring environment. Investors may also use earnings announcement news during an optimistic market sentiment scenario in a more informative way.

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

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

PEMODERASIAN PERPUTARAN ASET TETAP DALAM MENGANALISIS PENGARUH PROFITABILITAS, LIKUIDITAS, DAN ARUS KAS BEBAS TERHADAP MANAJEMEN LABA EFISIEN ATAU LABA OPORTUNISTIK

This study aims to determine the earnings management conducted by the company whether it is efficient earnings management or opportunistic earnings management, because earnings management is common and often done by companies and what factors influence the earnings management behavior of the company. To find out the type of earnings management carried out by the company, it will be measured using Accrual Discretion (DA), while measuring the factors that influence earnings management by the company uses Profitability (Return On Assets (ROA)), Liquidity (Current Ratio (CR)), and Free Cash Flow (FCF). To strengthen researchers' confidence in earnings management carried out by the company, one factor that supports other factors is Perputaran aset tetap (FATO). This research takes data from service companies that have been listed on the Indonesia Stock Exchange during the period 2019-2021 in the Property, Real Estate, and Building Construction sectors. The results of this study indicate that earnings management conducted by companies tends to be opportunistic, profitability and liquidity influence opportunistic earnings management, while free cash flow has an effect on efficient earnings management. Fixed asset turnover does not moderate the effect of the three factors on earnings management.
 Keywords: earnings management, opportunistic, efficient, profitability, liquidity, free cash flow, fix cash flow

Unknown Unknowns: Knightian Uncertainty and Corporate Opportunistic Earnings Management

AbstractUncertainty is inherent in the real world. Faced with Knightian uncertainty caused by many extreme events, this paper focuses on the analysis of corporate opportunistic earnings management behaviour under the unknown unknowns framework. This paper finds that with an increase in market Knightian uncertainty, corporations will significantly adopt both accrual earnings management and real earnings management. More importantly, when compared with upward earnings management, the results indicate that Knightian uncertainty will lead corporations to implement more downward earnings management. Our results are consistent with the big bath theory, which is also verified through the adjustment of non‐recurring profit and loss accounts. To understand the real process of earnings management, we also discuss the strategic choice behaviour of earnings management under different heterogeneous situations.

White-collar money laundering through opportunistic earnings management: fair value accounting practices of failed finance companies in Sri Lanka

PurposeThe purpose of this paper is to discuss how the failed finance companies in Sri Lanka used fair value accounting practices as an opportunistic earnings management practice to launder money under weak corporate governance structures.Design/methodology/approachThis paper uses a qualitative design under the philosophy of interpretivism. The case study research strategy is used inductively to investigate how fair value accounting had been used for money laundering.FindingsThe dishonest intention of major shareholders and board of directors had forced failed companies to misuse fair value accounting to manipulate performance and use them for personal benefits which were detrimental to the depositors and stability of the companies. The weak corporate governance structures which were developed because of regulatory forbearance were influential for manipulations. The concentrated ownership had reduced agency conflicts between shareholders and managers because major shareholders were the members of the board of directors. The appointed committees were not effective because of an inadequate number of independent directors with sufficient expertise. The reduced agency conflict between shareholders and managers has exaggerated the agency conflict with depositors. Therefore, it is recommended to dilute ownership concentration to establish good corporate governance structures and make stable institutions.Research limitations/implicationsThis study does not discuss the dishonest fair value accounting practices of all licensed finance companies because of the sensitivity of the matter for surviving companies.Originality/valueThis paper is an original work of the authors which discusses how fair value accounting practices had been used to launder money in failed finance companies in Sri Lanka as an emerging market context.

Research and development investments, development costs capitalization, and credit ratings: Exploratory evidence from UK R&D-active private firms

This exploratory study investigates research and development (R&D), specifically the relationship between development costs capitalization and the credit ratings of R&D-active private companies. Results indicate that uncertainty surrounding R&D investment is a leading factor in the credit risk assessment of R&D-active private companies. Hence, R&D intensity is seen as negatively impacting credit ratings. Although credit rating assessors are generally more concerned about downside risks, they seem to take into account different degrees of uncertainty. Consequently, our findings reveal that capitalized development projects that signal likely future economic benefits lead to better creditworthiness. Moreover, we infer from our additional analyses that credit rating assessors do consider the reasons of R&D-active private companies for capitalizing development costs. This conclusion is derived from evidence that discretionary capitalization ratios employed in opportunistic earnings management do have a significantly negative association with credit ratings. Conversely, non-discretionary counterparts have a significantly positive effect.

Corporate Governance Mechanisms and Earnings Management Activities: Evidence from the UAE Banking Sector

This study investigates the impacts of corporate governance mechanisms (CGMs) on earnings management (EM). Data covering 12 years (2009–2020) were collected via annual reports of the listed national banks in the UAE. Data were analyzed using descriptive statistics, correlation analysis, ordinary least squares (OLS) estimator, generalized least square (GLS) estimator and panel-corrected standard error (PCSE) estimator. Discretionary accruals were estimated using the adjusted Jones model as suggested by Dechow ( Contemporary Accounting Research, 1996, vol. 13, pp. 1–36). The overall findings of the study indicate that audit committee and ownership structure are not effective in mitigating managers’ opportunistic earnings management activities in the UAE banking sector. Hence, the assumption that audit committee and ownership structure have a negative impact on earnings management could not be ascertained. However, board characteristic was found to exert a diminishing effect on earnings management. Given that weak CGMs could fail to deter earnings management practices, the policymakers of the financial institution such as the banking sector should ensure that the CGMs are strengthened, and efforts should be exerted to facilitate strict adherence to measures that will diminish earnings management activities. The present study has contextual limitations to the UAE. Hence, the interpretation of the result is limited within this context.

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.

Pengaruh Konservatisme Akuntansi dan Tata Kelola Perusahaan yang Baik terhadap Manajemen Laba pada Perusahaan Badan Usaha Milik Negara

Abstract Purpose: This study was conducted to find confidence about the factors that affect earnings management in SOEs in 2018-2019 through accounting conservatism, audit committee expertise, independence commissioners. Research methodology: The methods in this research were quantitative with sample of 60 SOEs, sourced secondary data from annual reports and uses the EViews-9 application. Results: The conclusions are Random Effect selected as the model: (1) Earnings management significantly influenced by accounting conservatism in a positive direction, (2) Earnings management not significantly influenced by audit committee expertise, (3) Earnings management not significantly influenced by the independence commissioners. Limitation: In this study only the three variables and the period 2018-2019. Contribution: If the company applies accounting conservatism, it must be applied wisely and consistently, because will effect increase to income decreasing or smoothing. Likewise, empowerment of expert audit committee and independent commissioner needs to be done properly to balance the use of flexibility in accounting standards with the avaibility of quality financial reports. Because, in SOEs, even they have implemented GCG, they have not been able to reduce the opportunistic earnings management.

Do firms practicing integrated reporting engage in less myopic behavior? International evidence on opportunistic earnings management

AbstractResearch Question/IssueEarnings management is often perceived as a typical response to managers' short‐term objectives at the expense of long‐term benefits. However, this is not aligned with the most recent development in corporate reporting—integrated reporting (IR)—which encourages long‐term orientation and a trustworthy, honest, and ethical corporate culture. We thus examine whether firms practicing IR to a greater extent exhibit lower levels of earnings management.Research Findings/InsightsUsing multiple IR measures and an international sample of 19,926 firm‐year observations from 2008 to 2015, we document that while firms practicing IR engage in less accrual‐based earnings management, they do resort to real activities earnings management. Such opportunistic earnings management behavior is most pronounced when firms' incentive to manage earnings is high. We also show that opportunistic earnings management behavior is moderated in countries and regions where IR is mandatory, where capital markets are more developed, and where financial reporting is less frequent.Theoretical/Academic ImplicationsOur study contributes to the growing literature on whether IR is an effective governance tool in constraining earnings management behavior. The results show that the institutional environment plays an essential role in enabling corporate reporting initiatives such as IR to affect substantive internal changes rather than being used opportunistically.Practitioner/Policy ImplicationsFirms that practice IR to a greater extent are associated with a lower level of earnings management in countries where IR is mandatory, which contributes to the policy debate on mandating IR.

Accounting for uncertainty: an application of Bayesian methods to accruals models

We provide an applied introduction to Bayesian estimation methods for empirical accounting research. To showcase the methods, we compare and contrast the estimation of accruals models via a Bayesian approach with the literature’s standard approach. The standard approach takes a given model of normal accruals for granted and neglects any uncertainty about the model and its parameters. By contrast, our Bayesian approach allows incorporating parameter and model uncertainty into the estimation of normal accruals. This approach can increase power and reduce false positives in tests for opportunistic earnings management as a result of better estimates of normal accruals and more robust inferences. We advocate the greater use of Bayesian methods in accounting research, especially since they can now be easily implemented in popular statistical software packages.

The Effect of Supply Chain Common Auditor on Audit Quality

Client-specific knowledge is essential for auditors to plan audits effectively, to assess related audit risks and to interpret audit evidence properly. One of the important sources of such knowledge is information about the client’s major customers that contribute significant proportions of revenues and operating profits. Thus, auditors with privileged access to information about the client’s major customers can provide higher-quality audits than those without such access. This paper investigates whether auditors who audit both supplier firms and their major customer firms at the same time, which we refer to as supply chain common (SCC) auditors, exhibit higher audit quality than non-SCC auditors. We find that SCC auditors are better able to constrain opportunistic earnings management using accruals and thereby provide high audit quality. SCC auditors also reduce the possibility that their clients restate financial statements in the future to correct previously inflated earnings. Our results are robust even after controlling for possible endogeneity with respect to SCC auditor choice. The finding suggests that auditing along the supply chain allows auditors to accumulate client-specific knowledge, which in turn helps them to provide high-quality audit service.

Opportunistic earnings management or performance-related effects? Evidence from dividend-paying firms

We propose that much of the variation in standard (accruals and real-activities) earnings management metrics can be explained by firms' performance trajectories. We test our proposition using dividend change to distinguish high from low performance trajectory firms. We find that standard earnings management metrics have a stronger relation with performance trajectories than with unexpected earnings, a presumed target of earnings management. Firms that appear to manage earnings more are likelier to increase their dividends, but standard earnings management metrics do not explain changes in firm value around dividend change announcements. Applying standard earnings management metrics without taking performance trajectories into account can result in mistaking managers' efforts to increase firm value for earnings management.

The Impact of Financial Statement Comparability on Earnings Management: Evidence from Frontier Markets

This paper examined whether financial statement comparability constrains opportunistic earnings management in frontier market countries. Using a large sample of 19 frontier market countries, and an accounting comparability method that maps comparability across several accounting standards, the results show that enhanced financial comparability constrains accruals earnings management (AEM). Contrary to developed markets and novel to this study, a significant relationship between financial comparability and real earnings management (REM) was not found. For greater robustness, AEM and REM were also tested on both International Financial Reporting Standards (IFRS) adopting and non-adopting countries. The results suggest IFRS adoption constrains AEM, yet exhibited no impact on constraining REM. Additionally, the use of BigN auditors failed to conclusively show an ability to moderate EM. When combined, the results suggest that frontier markets engage in less REM than expected. It is also noted that the legal roots (civil vs. common law) play a significant role in constraining earnings management. Common law countries exhibited lower AEM when comparability increased; this significance was not found in countries that were rooted in civil law. Contributions from this study show that findings from developed markets cannot be generalised to frontier markets.

Detecting earnings manipulation and fraudulent financial reporting in Slovakia

Research background: Misleading financial reporting has a negative impact on all stakeholders since financial records are the primary source of information on financial stability, economic activity, and financial health of any company. The handling of them is primarily the responsibility of managers or owners and reasons for doing so may differ. Their common denominator is the artificial creation of information asymmetry to get different types of benefits. It is, therefore, logical that the issue of detecting opportunistic earnings management comes to the fore.
 Purpose of the article: The purpose of the study is to create a discriminant model of the detection of earnings manipulators in the conditions of the Slovak economy. 
 Methods: We used the discriminant analysis to create a model to identify fraudulent companies, based on the real data on companies that were convicted from misleading financial reporting in connection with tax fraud in the years 2009?2018. The model is inspired by the Beneish model, which is one of the most applied fraud detection methods at all.
 Findings & Value added: In order to achieve more accurate detection results, we extended the original model by taking into account the values of indicators from three consecutive years, i.e. by taking into account the development of the potential tendency of companies to be involved in opportunistic earnings management. Our model correctly identified 86.4% of fraudulent companies and overall reaches 84.1% classification ability. Both models were applied on empirical data on 1,900 Slovak companies from the years 2016?2018, while their overlap was 32.7% for fraudulent companies and 38.4% for non-fraud companies. This is a very useful result, as the application of both models rein-forces the results obtained and the identical classification of the company into fraudulent indicates that the manipulation of earnings occurs with a high probability.

The monitoring role of the media: Evidence from earnings management

AbstractIn response to the recent debate on the media, this paper examines the effect of media coverage on firm earnings management. Even if prior studies (Dyck et al., 2010; Miller, 2006) have documented the media's role in detecting and deterring accounting fraud (or extreme earnings management), it is unclear ex ante whether the media amplifies or curbs less egregious earnings management. Our results show that media coverage is negatively associated with both accrual‐based and real earnings management, suggesting that the media serves as an external monitor that curbs managers’ opportunistic earnings management behaviors. Further analyses show that the effect of media coverage on earnings management is more pronounced when monitoring from auditors is weak and when the other information intermediaries are active. Overall, the findings suggest a monitoring role of the media in firm financial reporting practices.

Earning Management and the Effect Characteristics of Audit Committee, Independent Commissioners: Evidence from Indonesia

This study aimed to investigate the effect of the independent commissioner and of the characteristics of the audit committee (measured by auditor size, independence, expertise, and activities) on the efficient or opportunistic earnings management. In terms of those companies listed on Indonesia Stock Exchange. The sample consists of 186 observations of those manufacturing companies in Indonesia Stock Exchange during the 2013-2018. Using panel regression fixed effect method, independent commissioners are found to have a significant effect on reducing earnings management. Based on The Positive Accounting Theory, the efficient perspective will occur when the compensation contract and internal control system, including monitoring done by the board of commissioners, limit the common view opportunistic manager and motivate the manager to choose the right accounting policy. The effective monitoring conducted by an independent commissioner can reduce agency costs because management prioritizes the best interests of shareholders by maximizing company resources. Furthermore, it was found that audit committee size can reduce earning management. It is due to the wide range of skills possessed by audit committee members to exercise oversight over management. Audit committees with accounting and financial expertise can reduce earnings management. This part of finding indicates that audit committee may tend to uphold conservative as accounting mechanism. Accounting conservatism has an important role to play in restricting opportunistic management behavior.

The “Quantitative Discretion Index”: A New Business Ethics Tool to Prevent Opportunistic Earnings Management Practices

In this article, we build a Quantitative Discretion Index (hereafter referred to as QDI) to identify within the financial statements the most vulnerable areas related to possible opportunistic earnings management (hereafter referred to as EM) practices, with the aim of supporting ethical behaviour in corporate social communications. In order to better explain the QDI construction method, a practical example is implemented, starting from an analysis of the consolidated balance sheet of an Italian listed company operating in the media sector (in 2016).
 
 The QDI might be added to the contents of voluntary information provided by companies that pay attention to ethical behaviour and corporate social responsibility. 
 
 Within each corporate balance sheet, the QDI allows stakeholders to identify the evaluation discretion areas, where any possible EM practices may be more likely and on which it may be more useful for stakeholders to focus their research attention.
 
 Business ethics aims to mitigate EM practices in social communications, including voluntary communication. Indeed, the discretional nature of the assessment of financial statements items by the administrative body represents one of the main weaknesses in the activity of mitigating earnings management practices.
 
 At present, the literature has dealt with the relations between ethical behaviour and EM; however, the research should also provide tools that can identify and neutralise the possibilities that opportunistic EM practices can be implemented, thus resulting in more ethical business practices.

Relationship between earnings management, CEO compensation, and stock return on Tehran Stock Exchange

PurposeThe purpose of this paper is to investigate the relationship between earnings management and chief executive officers’ (CEOs) compensation. Owing to the fact that earnings management does not have only opportunistic effects, but signaling effects, this study focuses on accruals quality to examine earnings management incentives. Thus, accruals quality is described against future cash flow. The empirical evidences suggest that a positive relationship between discretionary accruals and future cash flow provides predictive elements for earnings management, whereas a negative relationship between discretionary accruals and future cash implies to opportunistic elements for earnings management. Should there is no significant relationship between discretionary accruals and future cash flow, there will be no earnings management, and such a result suggests that incentives and managers’ performance in these firms differ.Design/methodology/approachThe statistical population of this research consists of all listed companies on the Tehran Stock Exchange during 2009–2016. Panel data method is applied in order to estimate the research model.FindingsFindings of the study show that there is no significant relationship between discretionary accruals and future cash flow in pharmaceutical and food industries, thus they have neither predictive nor opportunist earnings management, while the results evidence a negative significant relationship between discretionary accruals and future cash flow in machineries, automobile, mineral and chemical industries. Furthermore, it can be alleged that there is no significant difference between CEOs’ compensation in firms with opportunistic earnings management (OEM) and other types of earnings management. It shows that firms do not have appropriate plans for CEOs’ compensation. Moreover, the relationship between earnings management and stock return has been investigated in this study. We document that stock return is influenced by accruals quality and its components. In other words, stock return significantly differs in firms with OEM and firms without any kind of earnings management.Research limitations/implicationsThe authors’ findings provide contributions; for managers, it is noticeable that stock markets have sufficient comprehension about financial statements and the undertaken procedures on them, resulting in a higher return base on fair information. For investors and regulators, using the findings, may have deeper understanding to distinguish between industries that are recognized as opportunistic and non-opportunistic, which, in turn, results in better decision and regulation.Originality/valuePrevious studies have been mostly investigated OEM, while the current study examines both signaling and opportunistic aspects of earnings management.

Earnings Management and Different Tax Book To Explain Earnings Persistency

The study aims to test the direct and indirect effects of earnings management on earnings persistence through different tax books. Opportunistic earnings management results can reduce persistence of accruals. A decrease in accrual persistence will reduce earnings persistence. Different book tax variable was added as an alternative explanation. Earnings management can increase the book tax different reported by the company. A high tax different book can also reduce earnings persistence. A high tax different book is a signal of poor earnings quality. The population of this study is companies listed on the Indonesia Stock Exchange. The sample of this research is manufacturing companies listed on the Indonesia Stock Exchange in 2012-2018. Data analysis methods used in this study were descriptive statistics and path analysis. The path analysis results prove that there is an indirect effect of earnings management on earnings persistence through different tax books. The results of the study prove that there is no direct influence of earnings management on earnings persistence.Keywords: Book Tax Different; Earnings Management; Earnings Persistency.