Real Earnings Management Research Articles

Earnings management among distressed firms: evidence from India

ABSTRACT The rise in insolvency filings in India has drawn significant academic attention due to the high costs associated with financial distress. This study investigates the extent of earnings management by distressed firms in India, exploring factors like capital infusion, institutional ownership, regulation, and accounting flexibility. Earnings management is captured through three different proxies: accrual, real, and total earnings management. Financial distress is measured through three comprehensive definitions. Data spanning from 2008 to 2022 is collected, and panel fixed-effects regression is used for data analysis. The findings suggest that distressed firms tend to engage in earnings management through real earnings management, primarily via sales manipulations and overproduction. Earnings management is prevalent prior to new debt issuance but not before new equity issuance, and the presence of institutional investors effectively limits earnings management. Furthermore, companies resort to real earnings management when accrual earnings management is constrained by regulation and accounting flexibility.

The moderating role of corporate governance mechanism on the relationship between product market competition and earnings management: evidence from Bangladesh

ABSTRACT This article evaluates the moderating effects of corporate governance mechanisms on the relationship between earnings management and product market competition. Market concentration, as measured by the HHI has shown significantly negative association with accrual and real earnings management. In contrast, product market power, as measured by the industry size, demonstrates a significant positive association. The result further illustrates that the cost of industry entry significantly impacts accrual earnings management. The corporate governance mechanism (CGI) significantly decreases earnings manipulation. Moreover, the corporate governance mechanism (CGI) considerably moderates the association between market concentration, industry entry cost, and earnings management. Compared to high and low-competitive industries, the impact of market competition on earnings management in moderately competitive industries is more significant. After establishing the Bangladesh Competition Commission, product market competition has shown more impact on earnings management. This research is the initial attempt to examine the moderating effect of corporate governance mechanisms on the relationship between product market competition and earnings management from the perspective of Bangladesh.

CORPORATE GOVERNANCE AND REAL EARNINGS MANAGEMENT IN NIGERIAN LISTED FINANCIAL FIRMS

The focus of the study is the examination of the relationship that exists between corporate governance and real earnings management in Nigerian listed financial firms, with attention on three corporate governance variables (board tenure, board expertise and CEO ownership). The study adopts a longitudinal research design. Descriptive statistics, correlation analysis and panel regression analysis technique, with emphasis on the random effect model, were used for data analysis. A purposive sample of thirty seven (37) firms, out of the Forty nine (49) financial firms listed on the Nigerian Exchange Group, at year end 31st December, 2022 was studied for a period of seven years, 2016 to 2022. Findings from data analysis revealed that board expertise and CEO ownership have insignificant but positive relationships with real earnings management. In addition, board tenure was found to be significantly but negatively related to real earnings management. The correlation analysis revealed that there is a negative correlation between the variables board expertise, CEO ownership and real earnings management. Also, board tenure has a positive correlation with REM. The study recommends that directors of companies should be encouraged to spend longer time on the board as this will serve as incentive to avoid unfavourable earnings management.

Institutional Investors’ Intervention in Information Asymmetry and Real Earnings Management Within Dual-Class and Single-Class Chinese US-Listed Firms

Institutional Investors’ Intervention in Information Asymmetry and Real Earnings Management Within Dual-Class and Single-Class Chinese US-Listed Firms

Can Investors Detect Real Earnings Management during COVID-19?

The objective of this study is to examine if investors are able to identify real earnings management during the COVID-19 crisis by assessing the impact of real earnings management on the firm value. This analysis uses 2020–2022 data from Indonesia Stock Exchange (BEI)-listed manufacturing companies. This study used purposive sampling to collect data from 153 companies, yielding 459 observations that met the criteria. Using multiple linear regression, this study finds that investors are able to identify real earnings management within the COVID-19 pandemic. Nevertheless, empirical evidence demonstrates that profitability exerts a detrimental impact on firm value. This study is among the initial investigations examining the impact of real earnings management on the firm value during the COVID-19 crisis

The Real Earnings Management Mediation: Relation Between Ceo Overconfidence and Subsequent Performance

The Real Earnings Management Mediation: Relation Between Ceo Overconfidence and Subsequent Performance

The Effect of CSR, Information Asymmetry and ROA on Real Earnings Management with Size as a Moderating Factor

This study examines the effect of CSR, information asymmetry. and ROA on real earnings management with company size as a moderating variable. The sample was selected using purposive random sampling method on manufacturing companies listed on the IDX for the period of 2015-2018. The results show that all variables (CSR, information asymmetry, and ROA) have a signific ant effect on abnormal operating cash flows. However, abnormal operating costs are significantly influenced only by CSR and information asymmetry. Meanwhile, abnormal production costs are significantly influenced by CSR and ROA. The final results show that total real earnings management is influenced by two important factors: Information Asymmetry and ROA. Additionally, the results indicate that company size can moderate the influence of CSR asymmetry and ROA on real earnings management practices. This study contributes to filling the research gap regarding independent factors affecting real earnings management

The Effect of Audit Quality on Real Earnings Management: Evidence from Jordan

The purpose of the current study is to examine whether audit quality is capable of restricting real earnings management in a developing country such as Jordan. The fixed effect method was used to study the association between two audit quality (audit fees and audit firm size), and cash flow from operations (CFO), discretionary expenditure (DISX), and production cost (PROD) as proxies of real earnings management, for the industrial and service firms listed on the Amman Stock Exchange (ASE) during the period 2014-2023. Using 740 firm-year observations, the results showed that the audit fees (AFEE) are significantly and negatively related to cash flow from operations (CFO) and discretionary expenditure (DISX), and also significantly and positively related to production cost (PROD). Meanwhile, the result showed that the existence of audit firm size (B4) has a negative and significant effect on cash flow from operations (CFO) and production cost (PROD), and a positive and significant effect on discretionary expenditure (DISX). Further, for the control variables, the results showed that the firm size (FSIZE) has an insignificant effect on all model variants of real earnings management (REM). Meanwhile, financial leverage (LEV) has a negative effect on all model variants of real earnings management (REM). Thus, these findings provide shreds of evidence for all the regulators, investors, and executives in Jordan due to the significant impact on public policies and interest to the regulators and standard setters.

The real effects of M&As on targets’ peers

AbstractThis paper studies the real effects of targets’ acquisitions on their peers through investigating the real earnings management (REM) behavior of the targets’ rivals following the mergers and acquisitions (M&As). Using a difference‐in‐differences design, we find that, on average, rivals of acquisition targets would engage in more REM after M&A announcements. We further find that within rivals of the target, the post‐announcement increase in REM is more pronounced when: (1) the rival is relatively less similar to the target; (2) the rival serves as the targets’ rival more than once within a year; (3) the target earns a higher bidding premium or positive abnormal returns; or (4) the rival has the higher institutional ownership or more analyst following. Additional analyses reveal that rivals engaging in more REM would have a higher likelihood of being acquired in subsequent years and would be sold at higher premiums. We also find that targets’ rivals boost their short‐term performance by engaging in REM activities at the cost of their long‐term performance. Our results are robust to various robustness checks. Overall, our evidence suggests that an acquisition activity could have a real effect on the target's industry, i.e., the effect on the accounting choices of the whole industry.

Real earnings management’s effects on performance in firms reaching the loss avoidance threshold: indian evidence after controlling for variations in firm’s competitive strategy

Real earnings management’s effects on performance in firms reaching the loss avoidance threshold: indian evidence after controlling for variations in firm’s competitive strategy

The impact of financial leverage on accrual-based and real earnings management considering role of growth opportunities

Research hypotheses that focus on financial leverage, earnings management, and sustainability factors which include growth potential will be highlighted in this study. Data collection includes all establishments that are trading on the Iraq Stock Exchange which is the sample population. Data comprised 31 issuers; selection was done systematically by eliminating companies from fiscal years 2009 through the year 2021. Estimation of the multivariate regression model used panel data actually to test hypotheses of this study. In relation to hypotheses, findings show that real EMS is not affected by financial leverage while accrual EMS is negatively affected. Furthermore, the research finds that a pertinent issue in this regard is the fact that the negative influence of monetary leverage on accrual-based earnings administration increases when growth opportunities are present. In another case, the relationship between monetary leverage and real earnings management does not depend on growth opportunity. Hence, this study shows the need to factor in sustainability elements like readiness for growth when examining the relation between financial leverage, earning management, and company performance.

Fund holdings and real earnings management: An empirical analysis of the Chinese A-share market

Drawing on data from Chinese A-share listed companies spanning 2016 to 2023, this study investigates how fund holdings influence real earnings management (REM) practices. The results indicate that: (1) There is a significant negative correlation between fund holdings and REM, suggesting strong external oversight; (2) The governance effect of fund holdings is more pronounced in non-state-owned firms and those with a balanced equity structure, underscoring the critical roles of ownership nature and equity distribution; (3) High-quality internal controls also exhibit a significant negative correlation with REM, serving as a mediating factor between fund holdings and earnings management. These findings deepen our understanding of how institutional investors contribute to corporate governance and enhance internal control systems.

The Role of Real Earnings Management (REM) in The Relationship between Financial Distress and Tax Planning

The Role of Real Earnings Management (REM) in The Relationship between Financial Distress and Tax Planning

The Dynamics of Real Earnings Management: Analyzing the Effects of ROA, Company Size, and Leverage in Indonesia's Manufacturing Sector

The objective of this research is to examine the impact of ROA, company size, and leverage on REM practices in Indonesia's manufacturing business sector from 2017 to 2021. This research examines financial report data from companies listed on the Indonesia Stock Exchange using a quantitative method with panel data analysis and multiple regression. According to the findings, the only variable that significantly affects REM is the leverage variable. However, there is no evidence that ROA or SIZE significantly affect REM. According to these results, REM practices are driven more by debt obligation pressure than by financial performance indicators or firm size within the earnings management environment. This research adds to the existing body of knowledge on earnings management strategies within the setting of Indonesian manufacturing organizations and deepens our understanding of the factors that impact REM. The research findings highlight the importance of financial strategy planning and earnings management in considering the impact of leverage. It also highlights that REM decisions are influenced by more complicated internal and external factors than just firm size and ROA.

Alternative Methods of Measuring Real Earnings Management in R&D and SG&A Expenses

Alternative Methods of Measuring Real Earnings Management in R&D and SG&A Expenses

Does CEO agreeableness personality mitigate real earnings management?

Despite efforts to mitigate aggressive financial reporting, earnings management remains challenging to parties interested in inhibiting its dysfunctional effects. Using linguistic algorithms to assess CEO agreeableness personality from their unscripted texts in conference calls, we find that it is a determinant that mitigates a firm's real earnings management. Furthermore, such an effect is more pronounced when firms confront intensive market competition and financial distress and have weaker managerial entrenchment or when CEOs face stronger internal governance. Our findings persist even after we utilize several alternative real earnings management metrics and control other confounding personalities in prior earnings management studies. The subsample analysis and a two-step endogeneity controlling analysis further support that our results are not driven by the endogeneity in CEO selection process. Our study enriches the upper echelons theory, especially in the personality-situation interaction perspective, and provides insights for firms to incorporate managers' ethical-oriented personality into the mechanisms of curbing real earnings management.

Differences in the influence of the board of directors and the board of commissioners on real earnings management: empirical evidence from Indonesia

Purpose – This research investigates the influence of the Board of Directors (BOD) and the Board of Commissioners (BOC) on real earnings management (REM) practices in Indonesian manufacturing companies. Real earnings management involves genuine alterations to operational decisions that affect financial reporting.Design/methodology/approach – The research uses a sample of manufacturing firm listed on Indonesia Stock Exchange (BEI) from 2016 to 2022 and uses panel data regression techniques, including the Pooled Least Square (PLS) and Fixed Effect Model (FEM), to examine the effects of BOD and BOC characteristics on REM. The empirical analysis considers multiple proxies for BOD and BOC attributes, such as board size, independence, meeting frequency, and expertise. Additionally, control variables including leverage, firm size, and growth indicators are incorporated into the analysis.Findings – The findings reveal a significant positive relationship between the presence of BOD and REM activities. In contrast, the presence of BOC demonstrates a non-significant but negatively associated impact on REM. Furthermore, the research identifies the moderating role of BOC in strengthening the relationship between BOD and REM.Research limitations/implications – The research contributes to the existing literature by providing empirical insights into the roles of BOD and BOC in shaping REM practices within the Indonesian manufacturing context. These findings highlight the importance of board characteristics in influencing financial reporting decisions and emphasize the need for effective corporate governance mechanisms to mitigate opportunistic behaviors related to earnings management.Practical implications – Enhancing corporate governance practices, provide an input for more effective board composition, increase the investor confidence and transparency, enhance policy implications and provide advice for company’s long-term performance focus.Originality/value – This research addresses a gap in the literature by focusing on the Indonesian context. Use the BOC to moderate the relationship between BOD and REM may be less common in the context of Indonesia and even in regional focus.

The Impact of Audit Committees and Chief Executive Officer Characteristics on Real Earnings Management

Earnings management is an opportunistic behavior influenced by many factors. However, previous studies have not extensively investigated the impact of audit committee mechanisms and Chief Executive Officer (CEO) characteristics on real earnings management. This study aims to analyze the impact of audit committee mechanisms and CEO characteristics on real earnings management. The study utilizes secondary data from manufacturing companies listed on the Indonesia Stock Exchange from 2020 to 2022. The audit committee mechanism is proxied by using two measurements i.e. the number of audit committee meetings and the educational background of the audit committee, Meanwhile, CEO characteristics are proxied by the gender and the CEO's tenure. By applying multiple regression, this study finds that the number of audit committee meetings and CEO’s tenure have significant negative effects on real earnings management. Meanwhile, the background of the audit committee does not affect real earnings management. Interestingly, this study finds that male CEOs decrease real earnings management. Therefore, this research provides evidence that the number of audit committee meetings and CEO’s tenure play significant roles in reducing opportunistic behavior in a company.

Impact of environmental, social, and governance rating disagreement on real earnings management in Chinese listed companies

This study examines the impact of environmental, social, and governance (ESG) rating disagreement on real earnings management in Chinese companies. Using ESG ratings from Huazheng, Wind, SynTao Green Finance, and Bloomberg, we find that increased disagreements in ESG rating lead to higher real earnings management in the current period and over the next 1 to 2 years. This effect is driven by external attention, compensation incentives, and reputational pressure. Furthermore, companies with a financial management background and younger management show a stronger correlation. Specifically, ESG rating disagreement has a significant impact on the manipulation of discretionary expenses and production costs but not on operating cash flows. Additionally, high ESG-rated companies tend to manage their earnings through discretionary expenses when rating disagreements arise. Overall, this study reveals the potential incentive mechanisms for such companies, providing theoretical support for understanding the factors influencing real earnings management. It also suggests that regulators and investors should fully consider the impact of ESG rating disagreement when assessing company performance.

Corporate social responsibility (CSR) and earnings management: A structured literature review with a focus on contextual factors

AbstractThe link between corporate social responsibility (CSR) and earnings management represents an attractive empirical research topic in recent years. In view of the heterogeneous research results, the purpose of this structured literature review is to analyze the contextual factors of this complex relationship. We selected 107 quantitative peer‐reviewed archival studies on that topic and explain a possible positive and negative link between CSR and earnings management by the moral licensing hypothesis (principal agent theory) and the moral track hypothesis (stakeholder theory). We focus on firm‐ and country‐related moderator effects as contextual factors. Country‐specific studies are separated in developed (Anglo‐American and Continental European settings) and developing countries (African and Asian settings), code and case law regimes as well as the degree of shareholder protection and legal enforcement. In line with stakeholder theory, we stress that most of the included studies found a negative impact of CSR on earnings management with a focus on CSR performance and accruals‐based earnings management. Other measures, for example, CSR reporting, sub‐pillars of CSR performance, and real earnings management, are inconclusive due to reduced research activity. We do not find any structural changes between developed and developing countries, case and code law regimes, and regarding the strength of shareholder protection and legal enforcement. However, there are clear indications that corporate and country governance strengthens (weakens) the negative (positive) influence of CSR on earnings management. We stress major limitations of prior research and formulate useful recommendations for future research.