Reduce Earnings Management Research Articles

The implications of book-tax conformity and tax change for the earnings management of Portuguese micro firms

Since 2014, Portugal has a special, optional tax regime for micro firms called the simplified tax regime, which is an alternative to the general tax regime. In the simplified tax regime, income tax is a percentage of specific revenues, which could be seen as an example of lower book-tax conformity. The general tax regime is an example of higher book-tax conformity because tax income is based on accounting income. Using the tax regimes as a proxy of book-tax conformity we study the influence of the different tax regimes on earnings management, as well as whether earnings management in the general tax regime is used to achieve taxable income and reporting goals. We find that firms opting for the simplified tax regime manage earnings less than firms in the general tax regime, and they manage earnings upwards while the latter manage earnings downwards. Furthermore, we conclude that accruals with high book-tax conformity are used to decrease taxable income and those with low conformity are used to increase accounting income. This leads us to conclude that lower book-tax conformity reduces earnings management. This single country case study contributes evidence on book-tax conformity issues.

Faktor Yang Mempengaruhi Praktik Earnings Managementdi Industri Produsen Consumer Goods

The objective of this research is to obtain empirical evidence about the effect of CEO profiles which include CEO age, CEO tenure and CEO gender on earnings management practices in manufacturing companies in the Consumer Goods industry sector listed on the Indonesia Stock Exchange (IDX)during the year 2014 - 2018. This study uses secondary data . This research is conducted with a sample of 113 manufacturing company data with the technique used in this study is purposive sampling. The research data was processed using Statistical Product and Service Solutionsoftwarefor Windows version23 (SPSS version 23).The results of this research show that the CEO tenure has a significant influence on earnings management practices, while the age and CEO's gender do not have a significant effect on earnings management. Thus to reduce earnings management, it is necessary to pay attention to the tenure of the CEO.

PENGARUH INTELLECTUAL CAPITAL TERHADAP EARNINGS MANAGEMENT DENGAN PROFITABILITAS SEBAGAI VARIABEL MODERASI

The purpose of this study is to provide empirical evidence regarding the effect of human capital, structural capital, and relational capital which are the three components of Intellectual Capital on Earning Management and how profitability memorization of the relationship. Research data obtained from reports financial year 2015 to 2019 originating from 17 banking companies in Indonesia Purwokerto. The results of hypothesis testing prove that Intellectual Capital with the variables Capital Employed Efficiency, Human Capital Efficiency, and Structured Capital Efficiency can reduce earnings management practices in the company. In addition, profitability can also be found to strengthen relationship between Intellectual Capital and Earnings Management. This proves that the higher the level of profitability, the higher the value of Capital Employed Efficiency, Human Capital Efficiency, and Structured Capital Efficiency so that caused a decline in Earnings Management. Results Based on this research, It is expected that the company will always keep the profitability value stable thereby increasing the value of Intellectual Capital owned and is expected to earnings management practices that can harm the company.
 
 Keywords: Efficiency, Intellectual Capital, Earning Management, Profitabilitas

Board structure and earning management: A comparative study between the pre-pandemic and during the COVID-19 pandemic periods

The agent is granted decision-making authority over the company’s operations to achieve the principal’s objectives (Jensen & Meckling, 1976). The economic crisis during the pandemic compelled managers to exert additional effort, such as earnings management. They aimed to achieve the desired profit and serve the principal’s best interests. Board structure elements such as board size, independence, women membership, and chief executive officer (CEO) duality correlate with board governance. The elements improve the quality of financial reports and reduce earnings management practices. Therefore, this study aimed to investigate the board structure’s influence on the earnings management of Indonesian firms before and during the pandemic. Covering a sample of 539 firms recorded on the Indonesia Stock Exchange (IDX) in Indonesia from 2019Q1 to 2020Q4, panel data regression is utilized to test the hypothesis. This study finds that only board size significantly impacted earnings management. The board size is less effective in overcoming earnings management in the normal period. However, the COVID-19 pandemic encouraged the board of directors to increase management monitoring. This means more board directors can reduce earning management effectively during the pandemic. It highlighted the significance of many board directors in reducing earnings management during the pandemic.

Independent directors in Sweden and their influence on earnings through accrual and real activities management

The dominating perspective grounded in agency theory predicts that independent boards are more effective in monitoring and thereby reducing earnings management, yet the extant empirical evidence is inconclusive. We nuance the relationship between board independence and earnings management by introducing two additional theories that explain independent directors’ role on the board: the theory of personal dependence and praxis theory. According to personal dependence theory, the influence of independent directors on earnings management is a function of their competitiveness in the labor market, whereas the praxis theory attributes directors’ influence to the influence of the dominant coalition. We focus on two dimensions of earnings management  accrual and real activities management, and account for both direction and magnitude of directors’ influence. Through an empirical test on 148 Swedish corporations from 2017, our findings indicate that the presence of independent directors may not necessarily reduce earnings management. Instead, independent directors may be subject to multiple and sometimes conflicting task demands which differently influence both magnitude and direction of earnings management. Implications for our understanding of the role of independent directors and their influence on corporations are presented

Does internal and external governance reduce earnings management in family owned firms in Malaysia

The purpose of this study is to investigate the effect internal and external governance have on corporate governance effectiveness in highly-condensed family ownership structures in Malaysia. The establishment of RMCCG (2007) focuses more on the roles of audit committee independence adopted from developed countries' corporate governance standards. However, given the highly concentrated ownership structure in Malaysia, independence directors' fiduciary roles may be comprised as family firms' attempts to meet stakeholders' expectation. The sample of this study is from 1,206 firm level observations between the years 2004 to 2009 of firms listed in Bursa Malaysia. Our findings indicate that external governance as measured by stock market informativeness influences earnings management. Our research offers insights into the importance of external governance factors such as stock market volatility and market efficiency in promoting good governance in Malaysian family firms.

Corporate Governance, Political Connections, and Earnings Management

This study aims to examine the effect of corporate governance and political connection on earnings management. The corporate governance variable was reviewed using four proxies: bonus compensation, institutional ownership, independent commissioners, and financial expertise of audit committees. The study was conducted on 183 manufacturing companies on the Indonesian Stock Exchange for three research periods, namely 2017-2019. This study uses multiple linear regression to test the research hypotheses. The results prove that bonus compensation improves earnings management, while institutional ownership is proven to reduce earnings management. However, the other three variables, namely independent board of commissioners, financial expertise of audit committee, and political connections, do not affect earnings management practices.

Can a not-for-profit minority institutional shareholder make a big difference in corporate governance? A quasi-natural experiment

In this study, we examine the effectiveness of the China Securities Investor Services Center (CSISC), a new minority shareholder protection mechanism promoted by the China Securities Regulatory Commission, in constraining earnings management. Employing a difference-in-differences analysis for a sample of Chinese listed companies during 2015–2017, we find that CSISC shareholding reduces earnings management. We also find that this effect exists in firms with weaker internal or external corporate governance mechanisms and in firms without political connections. The additional analyses show that the difference in earnings management between the treatment firms (i.e., CSISC-holding firms) and control firms is diminishing after the CSISC shareholding pilot program was promoted nationwide, and that CSISC shareholding also constrains controlling shareholders' tunneling. Our findings have important policy implications for emerging markets that attempt to improve minority shareholder protection.

Earnings management and internal governance mechanisms: The role of religiosity

Motivated by the managers’ social norms and religious orientations, this study offers new avenues for investigating the effect of internal governance in curbing earnings management. We comparatively assess whether internal governance mechanisms (i.e., boards of directors and audit committees) employed by Islamic and conventional banks could differentially mitigate earnings management. We take a step further to assess this association under the extended governance mechanism (i.e. Shari’ah supervisory board) employed by Islamic banks. For a global sample of 14 countries operating on a dual banking system between the years 2007−2015, we find that, on average, having effective boards and audit committees enhance the quality of financial reporting in banking industry. Conditional on bank type, we find that large and independent board of directors (and audit committees) are negatively associated with earnings management for Islamic and conventional banks. There are no structural differences across the two bank types for the effectiveness of these traditional governance mechanisms. We also find that Shari’ah supervisory board (i.e., non-traditional governance) can significantly reduce earnings management. This finding is more evident when this board is large; its members have financial expertise and serve on multiple banks’ boards. Our results provide important implications for regulators governing dual banking systems by highlighting the explicit role of religiosity on managerial opportunism and the impact of double governance in promoting high financial reporting quality for global banking.

Before the Ink Is Dry: Does Sustainability Reduce Earnings Management? Theoretical Perspective

This paper reviews the field of sustainability to develop insights into earnings management studies and outline future research opportunities. We find that most previous studies use integrated reports measured by three dimensions of social, economic and environmental sustainability. These three dimensions are interrelated and communicate with each other to formulate the definition of sustainability. And the sustainability report should provide a balanced disclosure of sustainability performance, including both positive and negative contribution. This paper offers an insightful analysis into sustainability disclosure to support the analysis of IR benefits to balance the current literature that overlooks the benefits of IR.

Kemampuan Komisaris Independen dan Kepemilikan Institusional dalam Memoderasi Pengaruh Manajemen Laba Terhadap Nilai Perusahaan

The aim of every company is to earn profit and increase the firm value. When the firm values optimal, the prosperity of its shareholders also increase. Financial statements are one of communicatin media to its users regarding the firm performances. In an effort to enhance the firm value, management tends to deliberately perform certain accounting method, called Earnings Management. Earnings management is done so that the company’s financial statement looks good and healthy in a certain period, although it will cause a decrease in the firm value in the future. One way that can be used to reduce earnings management is to implement good corporate governance. This study aims to determine the effect of earnings management in company value which is moderated by independent commissioners and institusional ownership. The object of this study consist of 90 manufacturing companies listed on the Indonesia Stock Exchange for the period of 2016 – 2018. The sampling techinques was done by purposive sampling. The data analysis method to be used are descriptive statistical analysis, simple regression analysis, moderated regression analysis, classical assumption tests, and goodness of fit test. The results of this study indicate that earnings management is proven to have a negative effect on the firm value, independent commissioners are proven to weaken the effect of earnings management on the firm value, and institutional ownership are proven to weaken the effect of earnings management on the firm value.

Economic policy uncertainty and earnings management: Evidence from Japan

We empirically examine the effects of economic policy uncertainty (EPU) on earnings management in Japan. We find that EPU is negatively associated with earnings management, indicating that managers have incentive to reduce earnings management when EPU increases. We then examine the monitoring roles of various entities, focusing on the main bank that holds equity in their client firm. We find that the relationship between EPU and earnings management is less pronounced for firms with a main bank. The result is consistent with the view that the main bank’s monitoring role works well in normal times, resulting in less room for management to improve earnings quality when EPU is high. We find a similar result when considering firms with and without analyst coverage. These results suggest a moderating role of main banks and analysts in the relationship between EPU and earnings management. Finally, we find that the effect of EPU differs depending on subcategories on policy uncertainty and the extent of each firm’s exposure to that type of uncertainty.

Stock Index Adjustments and Corporate Earnings Management：Based on a Quasi-natural Experiment

As one of the basic institutions of capital market, stock index adjustments have attracted extensive attention from researchers and investors. Existing research on stock index adjustments mainly focuses on the impact on stock prices and stock trading volume, and barely discusses its long-term economic consequences. In addition, there are controversies about the information content of stock index adjustments in existing studies. Therefore, from the perspective of earnings management, this paper explores the long-term impact of stock index adjustments on corporate behaviors. The impact of stock index adjustments on corporate earnings management may have two opposite effects. On the one hand, stock index adjustments have a supervisory effect. After stocks are adjusted into stock index, these stocks will receive analysts’ attention and institutional investors’ shareholding will increase significantly, which may increase the company’s external and internal supervision and reduce the manager’s opportunistic behaviors; and the popularity and reputation of these adjusted stocks will improve and attract attention of the media and potential investors, thereby reducing earnings management behaviors. On the other hand, stock index adjustments have a stress effect. Due to the short adjustment period of stock index, in order to avoid stocks being transferred out of stock index and maintain the company’s reputation, the management is under pressure to ensure the continued selection of the company’s stocks by improving performance, which may adopt short-sighted behaviors for earnings management.Using 23 adjustments of the CSI300 Index from June 2007 to June 2018 and the back-up stocks announced during the same period as the research sample, this paper designs a DID model to examine the impact of stock index adjustments on corporate earnings management. The study finds that stock index adjustments have a significant impact on alleviating real earnings management, while the impact on accrual earning management is not significant, indicating that the supervisory effect of stock index adjustments has played a main effect. After a series of robustness tests, the results are still significant. Further research shows that stock index adjustments reduce real earnings management mainly through abnormal cash flows; in terms of duration, the impact of stock index adjustments on reducing real earnings management will still exist three years after being adjusted into index; and under different constraints, the impact of stock index adjustments on real earnings management is more significant when the ratio of independent directors is low and when the company is non-state-owned.The contribution of this paper may have the following three aspects: First, it enriches the research on the economic consequences of stock index adjustments, and provides supporting evidence for the information content of stock index adjustments. Second, from the basic institutions of capital market, it expands the research on the determinants affecting corporate earnings management. Third, in the research design, with the help of Chinese unique back-up stock institutions, it uses a DID model and controls the annual fixed effect, industry fixed effect, and company fixed effect to alleviate the endogenous problems existing in previous studies. For investors, this paper is helpful for them to further understand the impact of stock index adjustments, improve their understanding of adjusted stocks, and then optimize the efficiency of asset allocation.

The Impact of Board Internationalization on Real Earnings Management: Evidence From China

In this article, we examine the impact of board internationalization on real earnings management. Using the annual data of 2,899 Chinese listed non-financial firms with 16,638 firm-year observations over the period from 2008 to 2017 for empirical analysis, we find robust evidence that higher proportion of foreign directors on corporate boards reduces real earnings management. Results support the hypothesis that foreign directors increase boards’ effectiveness in monitoring the management and, consequently, lead to less earnings management by corporate executives. Our results are robust to alternative measures of board internationalization, instrumental variable analysis, and adding additional control variables. We further observe that foreign directors are more effective in reducing earnings management in firms with local directors with foreign experience and in Chinese provinces with developed institutional environment. Moreover, Chinese firms complement accrual and real activities–based earnings management, and board internationalization is effective in reducing both types of earnings management. Overall, our findings imply board internationalization improves the quality of reported earnings to outside shareholders.

Does Guarantee Network Reduce Firms’ Earnings Management?

ABSTRACT Using data from China, this paper investigates the effect of a guarantee network on firms’ earnings management. The results suggest that guarantee networks significantly reduce earnings management and this effect is more pronounced under tight monetary policy. Further analyses suggest that guarantee networks reduce earnings management through supervision mechanism rather than financing mechanism and earnings management reduction effect depends on the property ownership and related-party guarantee of the network. Our study provides new insights on the positive effect of guarantee networks in China and contributes to the governance role of guarantee networks.

Bagaimana Peran Tata Kelola Perusahaan Dalam Hubungan Antara Manajemen Laba Dan Risiko Idiosinkratik di Indonesia?

This study aims to investigate the effect of accrual earnings management and real earnings management on idiosyncratic risk. In addition, this study also examines the role of corporate governance in the relationship between the two. This study uses a quantitative approach. Research data obtained from www.idx.co.id and www.finance.yahoo.com in financial report data and company stock prices from 2012 to 2017 are listed on the Indonesia Stock Exchange. Based on purposive sampling, the total sample of this study amounted to 244 observations. Hypothesis testing is conducting by employing multiple linear regression analysis for panel data. This study suggests that real earnings management and accrual earnings management have a positive effect on idiosyncratic risk. This study also finds that corporate governance fails to weaken the relationship between earnings management and idiosyncratic risk. This study indicates that the Indonesia Financial Services Authority needs to coordinate with the Indonesian Institute of Accountants to reduce earnings management actions by companies listed on the Indonesia Stock Exchange.

Corporate Governance, Audit Quality, Family Ownership and Earnings Management

This study aimed to obtain empirical evidence regarding the influence of corporate governance and audit quality on earnings management measures, as well as their relationship with the effect of family ownership. Research on earnings management has been widely conducted, but research in family firms is still limited, while based on previous observational data, 95% of companies in Indonesia are family firms. In addition, the difference in the concept of corporate governance in developing countries compared to developed countries is crucial in relation to company supervision patterns. Earnings management practices carried out by company management can be caused by the occurrence of information asymmetry in which management as an agent has more information related to the company than the company owner. This information asymmetry is used by managers to mislead other parties with the aim of increasing their managerial career or compensation. Implementing the corporate governance mechanism is a way to reduce earnings management. Another factor affecting earnings quality is audit quality. This study took a sample of manufacturing companies listed on the Indonesian Stock Exchange during the 2017- 2018 period. 152 sample data were tested. This study used secondary data obtained from annual reports of companies listed on the Indonesian Stock Exchange. Moderated regression analysis (MRA) was used. Corporate governance had no effect on earnings management and audit quality had a significant effect on earnings management behavior. Family ownership was able to strengthen the effect of audit quality in determining earnings management actions.
 Keywords: corporate governance, audit quality, earnings management, family ownership

The Impact of Corporate Governance on Earning Management of Non-Financial Firms: Evidence from Pakistan

The main objective of the firm is to maximize the shareholder’s wealth; to achieve this objective the management indulge the earnings information by manipulation practices such practices reduce investors’ confidence. Furthermore, a hypothetical dispute recommends that a better quality of financial reporting reduce the information asymmetry, by refining the corporate governance compliance, result in reducing earnings management practices. Thus the main aim of this study is to explore the impact of corporate governance on earnings management by using panel data sample of 257 non-financial firms listed in Pakistan stock exchange for the period of 2012 to 2019 through Fixed effect model along with control variables. The results disclose that the CG system of Pakistan negatively and significantly impacts the EM activities of the companies registered in Pakistan stock exchange. Hence, concludes that the CG system is more effective to prevent the EM process. The entire results are seamless with prior research work that the effective CG scheme of the firms controls the EM and collapse of businesses. Keywords: Earnings Management, Corporate Governance, Corporate Governance Index.

Antecedents of Disclosure on Internal Control and Earnings Management

This study examines the effect of independent commissioners and the Audit Committee on internal control disclosure and its implications for earnings management in the banking industry listed on the Indonesia Stock Exchange for the period 2016–2018. In this study, a purposive sampling technique was used, combined with two multiple regression analysis models. The final sample for this study comprised 30 companies over the three years of observation, such that there were 90 observations in total. This study indicates that independent commissioners, as measured by their composition, do not affect the disclosure of internal control. However, as measured by the number of members, the Audit Committee had a positive effect on internal control disclosures. This study also indicates that the disclosure of internal control as measured by the Internal Control Disclosure index affects reducing the negative practice of earnings management. This study proves that the Audit Committee’s role is very dominant in assisting the Board of Commissioners in supervising internal control. This has implications for reducing earnings management practices. However, the Independent Commissioner’s role in the Indonesian banking industry has not been optimal in carrying out the supervisory function in this study. Keywords: Earnings Management, Internal Control Disclosure, Independent Commissioner, Audit Committee.

Does the executive labor market discipline? Labor market incentives and earnings management

This paper investigates the role of outside options in the executive labor market on earnings management decisions. To proxy for executives’ outside options, we use the number of times other firms cite the executive’s firm as a compensation peer. We find that executives with more citations conduct less earnings management. Exploiting the 2006 SEC requirement for compensation peer disclosure as a quasi-natural shock to executives’ awareness of outside options, we show that the executives who should be more responsive to outside options significantly reduce earnings management. Cross-sectional tests support a labor market discipline channel of outside options. Finally, we exploit state-level recognition of Inevitable Disclosure Doctrine and enforcement of non-compete agreements as cross-sectional restrictions on labor mobility and show that the impact of peer citations on reducing earnings management is stronger when there are fewer restrictions on mobility.