Reduction In Earnings Management Research Articles

A computational approach to transparency in corporate governance across borders

This article delves into the intricate relationship between information asymmetry and financial reporting comparability, with a particular emphasis on earnings management (EM) in cross-border corporate governance settings. Utilising data from 2,475 non-financial firms across 19 frontier markets from 2003 to 2019, the study employs pooled OLS, fixed effects, and between-effects models to scrutinise the impact of factors like financial comparability, reputable auditing, analyst coverage, and legal systems on earnings management. The findings reveal that enhanced financial comparability, facilitated by strong governance mechanisms such as reputable auditors and analyst coverage, leads to a reduction in earnings management and information asymmetry. Interestingly, leverage does not serve as a constraining factor as commonly believed. The results contribute to the growing body of literature on the application of data science, and challenge the pecking order theory (POT), while lending support to the knowledge-based view (KBV)and convergence theories, thereby offering valuable insights into the role of corporate governance in mitigating information asymmetry.

Accounting information quality and cash holdings—Moderating effects based on state ownerships and local appointments

PurposeThe purpose of this study is to explore the continuity and stability of the impact of accounting information quality on cash holdings, and the moderating effect of this relationship on state ownerships and local appointments.Design/methodology/approachBased on China's companies from 2011 to 2019, the authors divided cross-section and panel samples, adopted a linear and classification model and performed grouping regression.FindingsThe authors find that: first, the quality of corporate accounting information can significantly improve the level of cash holding, giving play to the strategic value effect of cash holding. But that boost is based on economies being able to solve agency problems. Second, the reduction of earnings management and the improvement of accounting information quality of NSOEs improve the level of cash holdings, while SOEs are on the contrary. Third, local appointments can play to the emotional strengths of their hometowns and play a synergistic role in this relationship, but the supervision effect of remote appointments is not obvious.Originality/valueThrough endogeneity and other tests, the conclusion is robust. Based on the agency and information asymmetry theory, the authors considered China's institutional and cultural factors, optimized accounting information's measurement and expanded the research boundary of the accounting field. The authors believe that applicable scenarios should be fully considered in the concluding relationship between accounting information quality and cash holdings. Enterprises should give full play to the advantages of cash holdings in strategic decision-making and financial efficiency, improve the quality of accounting information and also consider state ownerships and the differences in directors' emotions to reduce internal agency costs.

The breadth of ownership and corporate earnings management

This paper investigates the relationship between the breadth of ownership and earnings management. We find that the breadth of ownership is associated with a reduction in earnings management in Chinese firms. We partition the breadth of ownership into individual and institutional investors and find that the individual investors have the reducing effect. In contrast, institutional investors have the opposite effect, which can be mitigated by investor diversity and ownership percentage. We argue that stock liquidity and investors' clique are two crucial underlying channels through which the breadth of ownership impacts earnings management. Our study is of importance to various stakeholders.

IFRS adoption and financial reporting quality in the MENA region

PurposeGlobal interest in adopting the International Financial Reporting Standards (IFRS) has risen rapidly; however, the Middle Eastern and North African (MENA) countries have reacted differently towards the international diffusion. The purpose of this study is to examine the impact of the IFRS adoption/rejection decision on the quality of MENA region firms' financial reporting.Design/methodology/approachThe quality of accounting is examined through five metrics models to measure earnings smoothing, managing earnings towards a target and timely loss recognition. The research sample consists of nine countries over a period of ten years (2006–2015), resulting in 3,040 firm-year observations in the main phase, and 2,580 firm-year observations in the additional analysis.FindingsThe findings reveal that the overall sample of IFRS adopters in the MENA region has benefited from the adoption of IFRS, as the results show that there is a reduction in earnings management for IFRS adopters in comparison to local standards adopters. The sub-sample analyses also reveal that firms that adopted IFRS, in both the rentier (oil-dependent states) and non-rentier states, have a higher financial reporting quality than non-IFRS adopters. However, the magnitude of the financial reporting quality was higher for IFRS adopters in rentier states.Research limitations/implicationsSimilarly to previous research in this field, this study adopts a strict sample selection approach. Such an approach may limit the sample size, although the researchers have taken every possible step to ensure the use of an adequate sample size. The researchers acknowledge the strict period of ten years, despite having stated its rationale and importance of a more extended period to the quest of the paper.Practical implicationsThis research provides valuable input by evaluating the current status of MENA region firms' financial reporting quality, based on their followed accounting regime. The implications of this paper result in better-informed decisions for investors as the information contents of the annual reports enhance comparisons that facilitate the further flow of investments. This research also provides significant insight into the International Accounting Standards Board (IASB). The findings of this study will assist the IASB in understanding the MENA region by measuring the consequences of the countries' decisions on the quality of firms' financial reporting.Originality/valueThe findings of this study contribute to the literature by revealing that countries with medium levels of governance quality have benefited the most from the IFRS adoption, while IFRS adopters in countries with stronger governance quality demonstrate lower financial reporting quality.

The impact of IFRS on earnings management: evidence from Mexico

PurposePrior literature investigating the adoption of International Financial Reporting Standards (IFRS) finds that managerial incentives, capital market institutions and accounting standards interact to endogenously determine accounting outcomes. In this paper, we investigate the impact of changing from local GAAP to IFRS in 2012 on earnings management by public firms in Mexico. Given the institutional environment and managerial incentives in Mexico, there is not a clear theoretical prediction for the impact of Mexico's adoption of IFRS on earnings management. Thus, it is an empirical question whether a change in accounting standards had any effect on earnings management.Design/methodology/approachWe use three measures of earnings smoothing and one measure of upwards earnings management. Logistic regression analysis along with t-tests across two time periods, pre-IFRS (2009–2011) and post-IFRS (2013–2015) are used to determine if there is a significant change in the earnings management of Mexican firms, and if this change is different for companies cross-listed in the US and companies listed only in the Bolsa.FindingsWe hypothesize and find that adopting IFRS is associated with lower earnings management via earnings smoothing in Mexico, and the reduction is greater for firms cross-listed in the United States. Our results support the contention that strong institutions and enforcement aid in the implementation of new accounting standards.Originality/valueFirst, we contribute to the literature on the adoption of IFRS around the world. The consensus in the literature is that the impact of IFRS on financial reporting is country-specific. To our knowledge, we are the first to conduct such research on Mexico. Second, our findings indicate that IFRS adoption is associated with a reduction in earnings management through income smoothing by firms in Mexico. This contributes to a small but growing body of literature documenting consequences of improvements in Mexican capital markets. Results of research in this area provide important insights to capital market participants and regulators in Mexico.

The Effect of Managerial Ability on Earnings Classification Shifting and Agency Cost of Iranian Listed Companies

The objective of this study is to examine the relationship between managerial ability and earnings classification shifting of firms listed in the Tehran Stock Exchange (TSE). The paper consists of a sample of 1,875 firm-year observations after applying systematic elimination sampling method during a period of fifteen years, from 2005 to 2019. This study used the multivariate panel data regression for testing the links between variables. The results of this study provide that there is a positive relationship between managerial ability and earnings classification shifting. The obtained results indicate that there is a negative relationship between managerial ability and real earnings management and no relationship between managerial ability and AEM. In addition, managerial ability mitigates the negative effect of earnings management on future firm performance. Furthermore, managerial ability affects its agency cost positively due to the reduction in earnings management. This paper contributes to developing management literature and financial reporting literature. The study focuses on links managerial ability and earnings classification shifting and agency cost in a developing country like Iran, and the results of the paper can fill distance theory and practice by empirical test. Furthermore, the results of this study indicate in an emerging market, namely, Iran, that has a political business environment among the other countries of the Middle East, managerial ability can release Iranian firms on economic sanctions and financial pressures. This paper is the first study of its type in Iran.

Quarterly Operating Information Disclosure and Accounting Information Quality Improvement: A Research on the Interaction of Information in Regulatory Innovation

The production and transmission of accounting information is of great value in the capital market infrastructure. How to effectively improve the quality of accounting information tests the wisdom of all participants in the capital market. This paper breaks through the previous theories of internal governance and external supervision and expands a new perspective to improve the quality of accounting information from the interaction of information. This paper takes the opportunity of the natural experiment that the Shanghai Stock Exchange issued industrial information disclosure guidelines from 2013 to 2016, which required listed companies to disclose quarterly operating information, and the Shenzhen Stock Exchange did not have relevant mandatory requirements, to empirically test the interaction of information contents.This paper finds that, as a kind of information that can be mutually verified and interpreted with accounting information in content, the disclosure of operating information significantly improves the quality of accounting information of companies, which is manifested in the reduction of earnings management under accrual earnings management and the significant reduction of earnings reversal in the fourth quarter. Further research verifies the improvement of the quality of accounting information from the perspective of the capital market – the value relevance of accounting information is significantly improved.The contributions of this paper are as follows: Firstly, this paper takes operating information and accounting information as the research object, discusses whether and how different information contents disclosed by the same company can affect each other, and deepens the understanding of complex information transmission in the capital market environment. Secondly, the improvement of the quality of accounting information is a global problem. From the perspective of information competition, this paper discusses that timely understanding and verifying accounting information can improve the quality of accounting information, and provides a new theoretical basis for improving the quality of accounting information. Thirdly, the impact of non-accounting information on the information environment of the capital market has been paid more and more attention. This paper studies the effect of novel and unique non-accounting information on the improvement of information environment and enriches the literature of non-accounting information research. Fourthly, the research results provide evidence for regulatory authorities to improve the information environment in the capital market by using the interaction of information contents, and support the market-oriented reform direction of regulatory authorities to enhance the quantity and quality of information disclosure.

Does Public Enforcement Work in Weak Investor Protection Countries? Evidence from China*

ABSTRACTWe examine the efficacy of public enforcement in weak investor protection countries by examining the outcomes of a comprehensive public enforcement campaign in China. The campaign, launched in 2007, was designed to help enforce China's first mandatory Corporate Governance Code, issued in 2002. The 2007 campaign was characterized by several important features: (i) the campaign required firms to identify their problems before the securities regulators conducted on‐site inspections; (ii) the campaign provided a detailed checklist of the status of a firm's compliance with the Code; (iii) the campaign was transparent with regard to the disclosure and correction of identified problems; and (iv) the campaign threatened penalties for firms that failed to correct the identified governance problems in a timely manner. Our empirical analyses suggest that the 2007 campaign was effective in improving publicly listed firms' corporate governance. The corporate governance improvement was associated with a reduction in earnings management, higher earnings response coefficients, and higher operating accounting performance. In addition, we find preliminary evidence that the detailed checklist is partially responsible for the efficacy of the campaign. Our results suggest that public enforcement, if properly implemented, works in increasing shareholder value in weak investor protection countries.

HUBUNGAN KOMPLEMENTER ANTARA MANAJEMEN PUNCAK PEREMPUAN DAN LITERASI KEUANGAN TERHADAP EARNINGS MANAGEMENT PADA PERUSAHAAN YANG TERDAFTAR DI BEI PERIODE 2015

The purpose of this study is to examine whether the presence of female top management and female top management with financial literacy has an impact on reducing earnings management. Earnings management is proxied by discretionary accruals and measured using the Modified Jones (1995) model on a cross-sectional version. The study population use all company that has been listed in Bursa Efek Indonesia (BEI) at 2015. The amount of company used in this study are 291 companies. The results of this study shows that there is no effect between female top management and female top management with financial literacy on the reduction of earnings management.

The effect of ownership composition on earnings management: evidence for the Mexican stock exchange

PurposeThis paper aims to examine the relationship between different types of shareholders that command share ownership, family, institutions or external blockholders and earnings management. In addition, it examines the effect of company size on earnings management.Design/methodology/approachThe sample includes 67 companies listed in the Mexican Stock Exchange for the period 2005-2015. The sample composition is quite industry-balanced. A cross-sectional version of the Jones model (1991) is to measure the earnings management. The GMM (generalized method of moments) model is also estimated.FindingsThe results show that family and institutional ownership reduce the earnings management, but the impact is different depending on the company size.Research limitations/implicationsThe results show that there is a clear relationship between increasing participation of family and institutional investors and a reduction in earnings management. This is consistent with the literature that establishes that ownership is an effective regulatory mechanism that limits earnings management through closer supervision and involvement in management.Practical/implicationsFor companies’ corporate governance and regulatory authorities, the results of this study may serve to improve the decision-making.Originality/valueThis study shows that ownership structure can provide corporate governance in Mexican listed companies with different monitoring and control capacities to influence companies’ strategies, particularly in relation to the discretion of earnings management.

INVESTOR SENTIMENT AND EARNINGS MANAGEMENT: DOES ANALYSTS’ MONITORING MATTER?

ABSTRACT Purpose: Under the assumption that managers have incentives to practice earnings management in optimistic moments, this paper aims to analyze whether analysts’ monitoring affects the relation between the discretionary accumulations (accruals) and investor sentiment in the Brazilian capital market. Originality/value: The mediating role of analysts in the relation between investor sentiment and earnings management was not identified in the literature establishing an important gap to be investigated, given the relevance of the reported earnings for the decision-making process of market participants. Design/methodology/approach: Fixed effects regressions (industry and quarter) were estimated from 2010 to 2016, using all data and the subsetting sample according to whether or not companies were monitored by analysts. Findings: The results showed a reduction of earnings management after optimistic moments, which differs from the initial expectation and such behavior is attributed to the presence of analysts following companies. The results were robust to alternative proxies for earnings management and investor sentiment. Analysts have an influence on accounting earnings supporting the best disclosure, so inhibiting the practice of earnings management in optimistic moments. Therefore, although previous studies suggest that earnings management practices increase during optimistic moments, market participants may consider, even in such moments, a better earnings quality when firms are monitored by analysts.

The impact of regulation on information quality and performance around seasoned equity offerings: International evidence

We examine the impact of the enactment of the Market Abuse Directive (MAD) and the Prospectus Directive (PD) across 18 EU countries on seasoned equity offerings (SEOs). Using a difference-in-differences methodology, we document a significant reduction in earnings management, improved post-SEO stock return performance, and a decline in the adverse reaction to SEO announcements following the enactment of MAD. We find similar, albeit weaker, results post-PD. The impact is stronger in countries with high ex-ante institutional quality. Our results suggest that the enactment of these directives leads to improvements in information quality, which reduces information asymmetry around SEOs.

MANAJEMEN LABA: BUKTI EMPIRIS PADA PERUSAHAAN PERBANKAN YANG TERDAFTAR DI BURSA EFEK INDONESIA

; "> This research aims to investigate the effect of board commissioners effectiveness, audit committeeeffectiveness, institutional stock-ownership, and public stock-ownership on Earnings Managementactivities. The efectiveness of board comissioners and audit committee are measured based on theircharacteristics such as independence, activity, size, and competence. The research design isquantitative method. The Sample used in this study consisted of 31 Banking companies listed onIndonesian Stock Exchanges for the period of 2011 to 2013. The research hypothesis is tested usingOrdinary Least Squares methods (OLS). The result shows that board of commissiors’ effectivenes andpublic stock ownership do not affect on the earnings management activites. Also, audit committeeeffectiveness do not give effect on earning management activites except audit committee’scompetence which is found to impact on reduction of earnings Management. Other independentvariables such as institutional stock ownership is proven to influence earnings managementactivities.Keywords: Board Commissioners Effectiveness, Audit Committee Effectiveness, Institutional StockOwnership, Public Stock-Ownership, Earnings Management

THE IMPACT OF IFRS ADOPTION ON EARNINGS MANAGEMENT IN BANKING COMPANIES IN INDONESIA STOCK EXCHANGE

The issue of the IFRSadoption as a standard that can lead to a reduction of earnings management. The research aimed to give empirical evidence concerning the impact of the IFRS adoption on earnings management, and the test of the difference level of earnings management between before and after the IFRS adoption. The research scope focused on the implementation of IFRS adoption particularly in PSAK No. 50 and PSAK No. 55 (revised 2006) concerningfinancial instruments. The research objects were the banking companies listed in Indonesia Stock Exchange for 4 years (2008-2011), i.e. as many as 23 banks. Samples were taken by using the purposive sampling technique. The main variables in this research are IFRS and earnings management,and includes several control variable, among others are, size, financial leverage, market to book value and institutional investors. The data were analyzed usingmultiple regression analysis and different t-test analysis. The research result indicates that the IFRS adoption has not effect the decreaseon the earnings management.Among the four control variables, the variable institutional investor is found not to have theeffect on earnings management, whereas the other three variables haveeffect.The result of the different t-test analysis also indicates that statistically there is not significant difference on the level of the earnings management between before and after IFRS adoption. Thus, based on this study concluded that the adoption of IFRS still allow for the occurrence of earnings management.

The effect of the mandatory adoption of IAS/IFRS on earnings management: Empirical evidence from South Africa

This research investigates the effect of mandatory transition of South African companies to IFRS on earnings management, essential attribute of accounting quality. Specifically, the study examines whether the mandatory adoption of IFRS is associated with reduction of earnings management and therefore, an improvement of accounting quality. In addition, the paper focuses on the effect of corporate governance factors on earnings management.Earnings management is assessed by the magnitude of discretionary accruals and accruals quality. The paper compares earnings management in the pre-mandatory IFRS adoption period; 2002-2004 and the post IFRS adoption period; 2010-2012. This study focuses on a sample of 276 firm-year observations, 46 firms drawn from the 413 South African listed companies. A regression model was applied to examine the relation between mandatory adoption of IFRS, corporate governance mechanisms and discretionary accruals controlling for other some factors explaining earnings management.Our findings show that mandatory adoption of IFRS by South African companies is associated with lower earnings management. This result suggests that mandatory transition to IFRS contribute to an improvement in the quality of accounting information. Furthermore, results show that the percentage of independent outside directors, the separation of roles of CEO and Chairman of the board and company size have significant influence on reducing discretionary accruals.

Can Stock Price Manipulation Through Short-Selling Actually Increase Firm Value?

This paper studies the interaction between short sales and earnings management. It shows that informed short sale and uninformed short sale play different roles in disciplining earnings management. Informed short sale deters earnings management ex-ante and helps detect earnings management ex-post. Therefore, informed short sale increases firm value. On the other hand, uninformed short sale deters earnings management ex-ante but distorts firm's ex-post decision. Whether or not uninformed short sale should be restricted depends on the trade-off between the ex-ante reduction in earnings management and the ex-post increase in distortion.

Does increased board independence reduce earnings management? Evidence from recent regulatory reforms

We examine whether recent regulatory reforms requiring majority board independence reduce the extent of earnings management. Firms that did not have a majority of independent directors before the reforms (referred to as noncompliant firms) are required to increase their board independence. We find that, while noncompliant firms on average do not experience a significant decrease in earnings management after the reforms compared to other firms, noncompliant firms with low information acquisition cost experience a significant reduction in earnings management. The results are similar when we examine audit committee independence and when we use alternative proxies for information acquisition cost and earnings management. These findings indicate that independent directors’ monitoring is more effective in a richer information environment.

The effect of IFRS on earnings management in Brazilian non-financial public companies

This article evaluated whether changes in accounting practices brought a reduction in earnings management (EM) in listed Brazilian non-financial companies through discretionary accruals. We developed a model to observe the effect of the International Financial Reporting Standards (IFRS) on firms' EM as well as the restrictive effects of the audit, the corporate governance and the regulatory environment. We find that the ones with the most limiting effects is the regulatory environment. We also find that the transition to IFRS had a restrictive effect on EM in Brazil after its complete implementation.

The Effect of Brazilian convergence to IFRS on earnings managment by listed Brazilian nonfinancial companies

This article evaluates whether the changes in Brazilian accounting practices due to the convergence to international standards brought a reduction in earnings management by listed nonfinancial firms, causing an improvement in the quality of accounting information. We used the Jones model, as modified by Kothari, Leone & Wasley (2005), to measure earnings management by means of discretionary accruals using a sample of 361 companies between 2005 and 2011. The results indicate there was a change in earnings management through discretionary accruals after the convergence to IFRS in Brazil. We also found evidence that larger and more leveraged Brazilian firms tend to manage earnings less, but no evidence that being audited by one of the Big Four reduces the propensity for earnings management.

How have the IAS/IFRS adoption affected earnings management in EU? The effect of the absence/divergence of regulation and of legal enforcement

This paper aims to investigate the effect produced by the adoption of IAS/IFRS on earn-ings management in European Union. We calculate four indexes for the periods 2000-2003 and 2006-2009 to identify different reasons that could lead insiders to manipulate earnings and by comparing them we observe that the IAS/IFRS first-time adoption produced different effects on earnings management depending on the countries analysed and the kind of earnings management investigated. Moreover, while we find a positive relation between the reduction of earnings management and the extent to which IAS/IFRS regulates issues not covered by domestic standards, on the contrary we do not find any relation be-tween the such reduction and the existing divergence between domestic standards and IASB stand-ards. Finally, our findings also show a positive and significant relation between the reduction of the earnings management and the level of the legal enforcement of each country.