Proxy For Earnings Management Research Articles

Cultural Determinants of Corporate Governance: A Multi-Country Study

Purpose: The purpose of this study was to investigate if the culture of countries influences earnings management practices. Earnings management (EM) was chosen as a Corporate Governance mechanism.Methodology: We selected the Earnings Management proxies from Leuz et al. (2003). We adopted Hosftede´s cultural dimensions: power distance, individualism, uncertainty avoidance and long term orientation. The sample comprised companies listed in 2016 in the stock markets of Brazil, Argentina, Mexico, Chile, Colombia, Peru, and the United States. This work involved regression analysis to associate the dimensions of culture with the practice of EM of the firms.Findings: The results showed a positive relationship between EM and power distance and between EM and uncertainty avoidance. On the other hand, the results showed a negative relationship between EM and individualism and between EM and long term orientation. Overall, our results suggest that culture influences firms’ earnings management.Originality/value: Finance literature has had difficulty in assessing which variables can affect the development of CG in companies and its peculiarities in each country. It is also difficult to find country-level variables that are common to all countries. This paper breaks new ground by developing culture indicators of the countries and aggregating legal and firm-level variables to these indicators to advance the understanding of CG in the firms and nations.Theoretical and methodological contributions: studying culture at a multi-country level is important to improve the understanding of common aspects and the countries’ particularities that may affect the relationship between corporate governance and performance around the world.

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.

Management Entrenchment, Firm Characteristics and Earnings Management Of Conglomerate Companies In Nigeria

Sometimes the rivalry between shareholders and management is an indication of the level of entrenchment within the corporate environment. Managers are believed to routinely manipulate earnings in order to mislead shareholders about their company's actual economic outlook or performance. As a result, the study investigated the impact of managerial entrenchment, firm characteristics and earnings management of conglomerate companies in Nigeria. Employing the ex-post facto research design, the data was gathered from secondary source of the 6 listed conglomerate companies for the 11-year period running (2008-2018). The study used discretionary accruals a proxy for earnings management and to calculate discretionary accruals, the study used modified Jones model. The result showed that management entrenchment and firm characteristics have Impact on multinational firms ' earnings management in Nigeria. Specifically, from the conglomerate’s entrenchment proxies, CEO’s tenure has a positive and significant impact on earnings management (coff. =1.062821, p-value =0.0367) and management entrenchment as measured by CEO’s shareholding has a negative and insignificant effect on earnings management (coff. =-6252391, p-value = 0.4090) while firm size, profitability and leverage indicated a significant and positive impact on earnings management (coff, = 0.124587, p-value = 0.0000; coff. = 0.006647, p-value = 0.0431 and coff. = 0.032065, p-value = 0.0000). The study therefore recommended among others that management should reduce the debt in their capital structure in order to improve their companies’ value and their capital structure should be majorly financed by equity rather than debt and reduce CEOs tenure to minimise earnings management practices.

Accruals, Earnings Quality and Research Methodology

We first review prior earnings management studies with an emphasis on discretionary accruals as a proxy for earnings management. Discretionary accruals are estimated using widely accepted models, such as the Jones model or its updated ones with additional control variables to improve their prediction power. Nonetheless, estimated discretionary accruals are still subject to model specification errors. Then, we review alternative methods to identify earnings management by evaluating earnings distribution properties and frequencies of digits in collected accounting numbers. These alternative methods can identify anomalies in earnings distributions or frequencies of digits but cannot explain how such anomalies take place. Accordingly, future studies of earnings management may employ these alternative methods in conjunction with discretionary accruals to offer a better insight into earnings management practices.

The effect of CEO friendship and perceived pay equity on the earnings management behavior of business-unit managers

PurposeThe purpose of this study is to examine the possibility of adverse consequences regarding the recently enacted Dodd–Frank Act (DFA) pay-equity disclosure requirement in the USA, which will likely lead to lower levels of perceived Chief Executive Officer (CEO) pay fairness by subordinates. Specifically, the study examines whether the pay-equity disclosure leads to increased earnings management when business-unit managers have friendship ties with the CEO.Design/methodology/approachAn experiment is conducted wherein participants assume the role of a business-unit manager and are asked to provide an estimate for future warranty expense, which is used as a proxy for earnings management. The study manipulates friendship between the CEO and a business-unit manager and the saliency of CEO compensation pay-equity.FindingsCEO friendship ties, which are associated with lower levels of social distance, result in less earning management in the absence of the DFA CEO pay-equity ratio disclosure. However, CEO friendship may result in negative repercussions in terms of higher earnings management in the post-DFA environment when managers are provided with the pay-equity disclosure.Research limitations/implicationsFuture research may expand this study by examining how the adverse consequences of the CEO compensation saliency disclosure can be mitigated.Practical implicationsManagement, audit committees and internal auditors should consider the possibility of unintended consequences of the increased transparency of CEO pay-equity while designing management control systems.Social implicationsThis study highlights the importance of understanding how employees’ social relationships with leaders may influence their behavior.Originality/valueUnlike prior research, which focuses on senior executives’ direct incentives to manipulate earnings and subsequently increase their compensation, this study provides evidence regarding the earnings management behavior of business-unit managers.

Association Between Earnings Management and Corporate Governance Mechanisms: A Study Based on Select Firms in India

This article initially attempts to search for a robust model for the estimation of discretionary accruals (proxy for earnings management) of select manufacturing firms in India. The two models from extant literature considered to search for a better model are the modified Jones model put forth by Dechow, Sloan, and Sweeney (1995 , The Accounting Review, 70, 193–225) and the Kasznik (1999 , Journal of Accounting Research, 37, 57–81) model. Subsequently the study aims at appraising the linkage between various corporate governance mechanisms and earnings management using panel data regression and employing Fisher’s probability test. The study reveals strong negative association of earnings management with the percentage of independent directors on the board and with diligence of the board members. However, it fails to accept the conjecture that percentage of promoters on the board has a positive impact on earnings management. The assumption that audit committee size has a negative impact on earnings management could not be established too. Furthermore, the study fails to draw any concrete relationship between earnings management and other governance mechanisms considered, such as board size, frequency of board meetings, CEO duality, audit committee independence, frequency of audit committee meetings and auditing by Big-4 auditors.

EFFECTIVENESS OF FIRM PERFORMANCE AND EARNINGS MANAGEMENT TO STOCK PRICES

The long-term goal to be achieved in this research is to analyze stock prices by using firms performance and earnings management in the consumption sector manufacturing companies on the Indonesia Stock Exchange. Firm performance uses profitability proxies measured through Return On Assets (ROA) and leverage measured through Debt to Equity Ratio (DER), while the proxy for earnings management used is the actual specific model, namely working capital accruals. The stock price used in this study is the stock price one week after the publication date of the 2016-2018 financial statements. The results of the study indicate that the performance of companies proxied through ROA and DER is able to have a significant positive effect on stock prices in registered manufacturing sector manufacturing companies on the Indonesia Stock Exchange. The results of this study prove that investors are very concerned about the information contained in the financial statements published by the company, especially information about profits or profits obtained by the company and the debt used by the company for its operations, while earnings management is able to give an influence but not significant on stock prices. This means that investors do not respond to information, including accruals in the financial statements. KEYWORDS: Return on Asset, Debt on Equtity Ratio, Earning Management, Stock Price.

Do related party transactions affect earnings quality? Evidence from East Asia

Purpose The purpose of this paper is to examine the effect of related party transactions (RPTs) and types of RPTs (complex, simple and loan) on earnings quality in four East Asian countries: Hong Kong, Malaysia, Singapore and Thailand. Design/methodology/approach RPTs and types of RPTs are measured using two approaches, magnitude and abnormal (magnitude change). Earnings quality is measured using proxies for accrual earnings management and identified as discretionary accruals (DAC) and performance matched discretional accruals (PMDAC). Findings The results suggest that firms in these countries experience poor earnings quality when they are engaged in RPT. The effect of RPT-simple on earnings quality is more severe than RPT-complex. However, the presence of higher investor protection and stricter enforcement of regulations in countries like Singapore and Hong Kong reduce the negative impact of RPTs on earnings quality. Research limitations/implications The results support the argument that the presence of controlling shareholders in East Asia is likely to lead to engagement with RPTs, which will increase the likelihood of firms’ earnings manipulation via DAC. This study has two limitations. It only focuses on Hong Kong, Malaysia, Singapore and Thailand, and the results may not be generalizable to other countries. Second, this study only measures the magnitude and abnormal RPTs based on the disclosures available in annual reports. Originality/value This paper contributes to the literature by examining the effect of RPTs and types of RPTs on earnings quality in four selected East Asian countries.

CEO characteristics and earnings management: empirical evidence from France

PurposeThe purpose of this paper is to investigate the impact of chief executive officer (CEO) characteristics on the earnings management examined by the discretionary accruals.Design/methodology/approachThe sample includes 151 French firms listed on the CAC ALL shares index from 2006 to 2015. The paper uses the feasible generalized least square regression technique to test the relationship between CEO characteristics and earnings management.FindingsUsing discretionary accruals as a proxy for earnings management, the results obtained from the three models (Jones modified 1995; Kothariet al., 2005; Raman and Shahrur, 2008) indicated that there is a positive and significant relationship between CEO duality, CEO nationality and the quality of financial communication. However, no significant relationship was found between CEO board member, CEO turnover and earnings management.Originality/valueA literature review finds that fewer studies have investigated the relationship between earnings management practices and personal CEO characteristics in the French context. Furthermore, no study yet has examined the influence of CEO nationality and CEO age on earnings management practices. This study provides empirical data about the impact of CEO’s characteristics on earnings management and how these different characteristics can facilitate the transition to manipulate and influence the quality of financial communication.

Earnings management and debt maturity: Evidence from Italy

In this work, we examine whether earnings management affects the debt maturity structure of Italian non-SMEs. We employ accruals quality as a proxy for earnings management. We measure the accrual quality as the absolute value of residual reflects the accruals that are not related to cash flow realized in the current, following or previous year. We measure the debt maturity in two ways. First, we consider it as a dummy variable that takes the value equal to 1 if some of the debt is long-term (exceeding one year), and 0 otherwise. Second, we compute the debt maturity as the ratio of long-term debt to total debt. We employ a quantitative approach, carrying out several regressions (probit, logit, and tobit) analyses to investigate the effect earnings management on debt maturity structure, using financial statement data of 1,001 Italian non-SMEs sampled over the period 2011-2017. This paper provides theoretical and practical findings that support the literature on earnings management. First, the study confirms that accrual quality can use as a proxy of earnings management by the academic community. Then the findings show that earnings management is negatively associated with the possibility to access to long-term debt, and with a proportion of long-term debt in total debt. This evidence may support the managers when they have to plan the financial structure, the lenders and the creditors in their decision-making processes, and the policymakers when they have to set programs aimed to make easier the access to external financial resources.

Appraisal of the Impact of Earnings Management on Financial Performance of Consumer Goods Firms in Nigeria

There are two different tools of earnings management; real activities and accruals. Prior research shows that the discussion on earnings management was primarily focused on accrual manipulation strategies while recently many articles have focused on real activity manipulation as a proxy for earnings management. In accrual manipulation, managers introduce their judgment and subjectivity by accounting choices in the financial reports, and hence it could distort a company’s underlying operating performance. The main objective of this study was to determine the impact of Earnings Management on financial performance of consumer goods firms in Nigeria. The study adopted the ex-post facto research design and used simple regression analysis for analysing the pooled secondary data obtained from three selected consumer goods firms in Nigeria. The dependent variable in this study is financial performance proxy by Total Assets, Equity and Total liability of the firms while Earnings Management is the independent variable (proxy by Net profit or Profit for the Year). The findings show that Earnings Management does not have significant impact on financial performance of consumer goods firms in Nigeria. The study recommended that there should be conscious effort by management of consumer goods firms to improve the earnings management situation in order to impact on financial performance of the sector; Management of consumer goods firms should emphasize the equity of firms as a means of widening ownership fund position and internal source of capital; There must be re-assessment of the liabilities of such firms for proper positioning of financial performance of consumer goods firms in Nigeria.

Effects of Audit Quality and Audit Committee Characteristics on Earnings Management During the Global Financial Crisis – Evidence from Australia

Purpose: We examine the earnings management behaviour of Australian firms during the Global Financial Crisis (GFC) and the effectiveness of audit quality and audit committee characteristics in mitigating such behaviour. Design/methodology/approach: The sample consists of 503 firm-year -observations spanning from 2006 to 2009. The years 2008 and 2009 are considered as the global financial crisis period. Discretionary accruals have been used as the proxy for earnings management. To test the hypothesis, we apply multivariate fixed effect regression to test the hypothesis. As the robustness test, we use propensity matching score, to find out comparable clients audited by Big-4 and Non-Big-4 audit firms to control observations to mitigate the effect of selection bias. Findings: We find that the sampled firms engage in a significantly higher level of earnings management during the GFC compared to the pre-crisis period (PCP). We find that audit quality, in terms of being audited by Big4 auditors, constrains earnings management during the PCP, but not during the GFC. Audit committee independence has a significant mitigating effect on firms' earnings management, while audit committee members' accounting and finance expertise do not constrain earnings management. Research limitations/implications: Future research can include a larger sample and examine the effects of other corporate governance variables on earnings management during periods of macroscopic shocks. Practical implications: Our findings support the importance of having independent directors in the audit committee. Moreover, the fact that Big4 auditors do not constrain earnings management during the GFC although constraining it during the PCP implies that regulators and policy makers should concentrate more on the audit committee for effective mitigation of earnings management during periods of macroeconomic shock. Originality/value: A key policy implication of the findings is that regulators and standard setters may need to shift their focus from the quality of a firm's auditor to encouraging well-functioning audit committees. The specific action to promote audit committee effectiveness includes mandating independence.

Depressing Earnings Management in Palestinian Corporations: The Role of Audit Quality, Audit Committee, and Accounting Conservatism

The influence of audit quality, the existence of an audit committee, and accounting conservatism in depressing earnings management (EM) were examined in this study while controlling for board characteristics, financial leverage, and client's company size. A regression model on a sample of 184 firm-year observations of 34 companies listed on Palestine Exchange (PEX) between 2011 and 2016 was employed. Based on the results, the independent variables demonstrated negative association to discretionary accruals, measured by four modified versions of Jones model, as a proxy for EM; in other words, the variables were effective in depressing EM and consequently, in enhancing the financial statement quality. A similar negative association was also demonstrated by board size and chief executive officer (CEO) duality. Meanwhile, financial leverage and EM showed a robust positive association suggesting that Palestinian corporations employed EM mainly to influence creditors' decisions. Policy makers should consider the results presented in this study to improve regulations related to reporting and governance.

Earnings management prior to mergers and acquisitions: The role of acquirers’ ownership structures. Evidence from Poland

Abstract The purpose of the study is to identify earnings management behaviour prior to mergers and acquisitions with a particular emphasis on the role of acquirers’ ownership structures. We build panel regression models describing the associations between earnings management proxies and measures of mergers and acquisitions with additional variables describing elements of acquirers’ ownership structures. In the study, we confirm that acquirers do not engage in upward management prior to mergers and acquisitions. We find, however, that managerial ownership reduces magnitudes of total upward real earnings management. The presence of institutional investors diminishes accrual-based upward earnings management prior to mergers and acquisitions.

Incorrect Inferences When Using Generated Regressors in Accounting Research

We analyze the bias associated with the use of generated regressors, i.e., independent variables generated from a first-step auxiliary regression, in accounting research settings. Widely used generated regressors in accounting include discretionary accruals, the Dechow and Dichev [2002] measure of accrual quality, asymmetric timeliness coefficients, the Khan and Watts [2009] C-score, earnings persistence coefficients, real earnings management proxies, discretionary book-tax differences, and predicted values capturing litigation risk, bankruptcy risk, and the likelihood of a tax shelter. Under general conditions, the presence of generated regressors does not affect the consistency of coefficient estimates. However, commonly used generated regressors can bias standard errors towards zero, producing type I errors. We discuss various types of generated regressors (predicted values, residuals, coefficients, etc.) and demonstrate the associated standard error bias and factors affecting the bias using simple regression models and simulation analyses. We also show the bias can be substantial in common accounting settings by examining the magnitude of the bias when examining the effect of litigation risk on management forecast characteristics. Finally, we outline two corrections for the bias and show how the corrections, including bootstrapping standard errors, improve inferences.

Equity incentives, earnings management and corporate governance: Empirical evidence using UK panel data

Using a UK panel data set drawn from 1675 Chief Executive Officer (CEO) year observations and 1540 Chief Financial Officer (CFO) year observations, we examine the relationship between CEO and CFO equity incentives and earnings management. In addition, we examine the moderation effect of corporate governance mechanisms on the relationship between executives’ equity incentives and earnings management. We use multivariate regression models to test our hypotheses. We find that CEO equity incentives are related to higher absolute and income increasing earnings management. These results support the managerial power theory argument that CEOs exploit equity-linked compensation to obtain more personal benefits without causing public anger. Contrary to CEO equity incentives, we could not find any significant relationship between CFO equity incentives and any of the earnings management proxies. In addition, we find that corporate governance quality (measured by individual mechanisms and overall index) has no effect on the relationship between executives’ equity incentives and earnings management. This result indicates that whereas some corporate governance mechanisms can reduce earnings management in general, they do not affect wealth driven incentives to manipulate accruals. In total, results question the effectiveness of the corporate governance system in mitigating opportunistic behavior motivated by executives’ compensation structures

Earnings management in the pre-IPO process: Biases and predictors

We analyze a sample of 3,293 IPOs from 29 countries to investigate the firm, industry, and country characteristics related to earnings management during the IPO process. We find that IPO firms tend to have significantly positive discretionary accruals (DCA) both prior to and after the IPO, suggesting that IPO firms tend to engage in pre-IPO earnings management. However, we also find that using a proxy for earnings management in the IPO year may lead to biased conclusions concerning pre-IPO earnings management. Firms that are more likely to need access to capital markets in the future (firms with high leverage, and firms backed by a venture capitalist) are less likely to engage in pre-IPO earnings management. Firms operating in countries with a superior rule of law are also less likely to engage in earnings management. Lastly, we find that firms may engage in pre-IPO earnings management in part to avoid returning to the capital markets to raise more funds (capital market staging). This result is robust to possible endogeneity bias stemming from management self-selection.

Connecting earnings management and corporate social responsibility: A renewed perspective

AbstractThis paper aims at discovering the association between earnings management (EM) and gender diversity in boards of directors as a predictor of the corporate social performance (CSP) of non‐smallmedium‐sized enterprises in the context of corporate social responsibility (CSR). The existence of a broad literature on the topic allows us to assess EM and its relations with CSR. We used an OLS regression analysis and the accrual quality measure as an EM proxy to investigate our sample of 697 Italian non‐small and medium‐sized enterprises. Our main results reveal that the presence of women on boards of directors results in the adoption of fewer EM practices. Therefore, our empirical findings support the notion that boardroom gender diversity as an instrument of CSP reduces the use of EM practices. The results of this paper are of most relevance to policymakers and academic communities focused on promoting CSP and CSR.

Corporate and Strategic Information Disclosure and Earnings Management: Evidence from Listed Firms at the Uganda Securities Exchange

The purpose of this study is to examine the effect of corporate and strategic information disclosure on earnings management among listed firms at the Uganda Securities Exchange. We conduct our survey on a census of 9 non-financial listed firms spanning a period of 6 years (2012-2017). The study uses the magnitude of discretionary accruals obtained from the De Chow, Sloan and Sweeney (1995) model as a proxy for earnings management. The study’s results show a negative and significant effect of corporate and strategic information disclosure on earnings management. The implication of this finding is that information disclosure related to corporate and strategic information constitutes a constraint to the proliferation of earnings management. The study could benefit regulatory bodies that are considering making disclosure regimes effective. For instance, we find that the disclosure of corporate and strategic information drives EM downwards. In addition, the results of this study might assist regulators and policy makers in understanding better the interconnections between corporate and strategic information disclosure and earnings management practices in Uganda. This study, however, has some limitations. First, because the study uses a self-constructed disclosure index, certain information items employed in prior studies might be omitted. Second, whereas hand collecting the necessary data on corporate and strategic information from the narrative section of the annual reports allows for a data set containing rich information, the exercise is costly and time-consuming.

AGENCY CONFLICT AND EARNINGS MANAGEMENT

This conflict between firm insiders and firm outsiders in case to allocate the free cash still unclear in the context of agency theory. This study examines the sample of 25 public firms in consumer goods industry listed in Indonesia Stock Exchange over period of 2010 until 2018 in term to detect agency conflict with earnings management as its application. This study finds that discretionary accruals as the proxy of earnings management is insignificant on debt policy and growth opportunities. Those findings indicate that, Indonesian public firms do not practicing earnings management which means agency conflict is not exist over the sample of this study.