Intra-Year Shifts in the Earnings Distribution and Implications for Earnings Management*

This study aims to prove the effect of the company's status, i.e membership on the Islamic capital market and the status as suspect firm, as a determinant of real earnings management (REM). REM is conducted by abnormally increasing sales, increasing production and reducing discretionary costs in order to achieve a certain earnings target. This study uses Earnings Distribution Analysis (EDA) technique, which refers to the Prospect Theory (Kahneman & Tversky, 1979) to identify the suspect firms. Suspect firms are companies that have small positive earnings. The samples of this research are companies listed on the Indonesia Stock Exchange in 2011 and 2012. Based on the result of regression analysis, hypothesis testing results show that the suspect firms conduct real earnings management in all three types of activities more aggressively than the non-suspect firms. Furthermore, this study also showed empirical evidence that there are differences in real earnings management actions between companies listed in the Islamic capital market compared to conventional capital markets. Then, this study also showed that the Islamic capital market is more appropriate in response to the REM than the conventional capital market.

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Earnings management in the aftermath of the zero-earnings discontinuity disappearance

Journal of Applied Accounting Research ◽

10.1108/jaar-03-2017-0047 ◽

2018 ◽

Vol 19 (3) ◽

pp. 401-422 ◽

Cited By ~ 4

Author(s):

Naser Makarem ◽

Khaled Hussainey ◽

Alaa Zalata

Keyword(s):

Earnings Management ◽

Content Type ◽

Earnings Distribution ◽

Accruals Management ◽

Small Loss ◽

Management Behaviour ◽

Management Literature ◽

The Right ◽

Loss Firms ◽

Practical Implications

Purpose The purpose of this paper is to investigate earnings management by firms reporting a small profit or a small loss after the recent evidence that the discontinuity around zero earnings has disappeared. Design/methodology/approach Using a large sample of US firms for the period 2002–2011, regression analysis and earnings distribution approach are employed to examine the earnings management of small-profit and small-loss firms in terms of both accruals management and real activities manipulation. Findings The results suggest that both small-profit and small-loss firms are engaged in upward manipulation of accruals and real activities. This implies that failure to document a difference between firms to the right and left of zero by prior studies is not due to small-profit firms not managing earnings, but rather this is more attributable to loss firms engaging in upward manipulation. Furthermore, it is indicated that the discontinuity around the distribution of earnings change has also recently disappeared as firms reporting a small earnings decrease demonstrate similar earnings management behaviour to those reporting a small earnings increase. Research limitations/implications This study is subject to the measurement error which is a common limitation in the earnings management literature. Practical implications The results suggest that the users should be aware that, in addition to firms that meet benchmarks by a slight margin, firms narrowly missing benchmarks are also involved in earnings management. Originality/value This study shows that the disappearance of the discontinuity around zero earnings and zero change in earnings should not be interpreted as a sign of no earnings management. It also explains how earnings management could have contributed to the disappearance of the discontinuities in earnings distribution.

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Prospect theory, industry characteristics and earnings management

Review of Accounting and Finance ◽

10.1108/raf-07-2014-0075 ◽

2015 ◽

Vol 14 (3) ◽

pp. 324-347 ◽

Cited By ~ 3

Author(s):

Shaista Wasiuzzaman ◽

Iman Sahafzadeh ◽

Niloufar - Rezaie Nejad

Keyword(s):

Earnings Management ◽

Prospect Theory ◽

Management Practices ◽

Capital Intensity ◽

Distribution Model ◽

Management Activity ◽

Content Type ◽

Earnings Distribution ◽

Regression Techniques

Purpose – This paper aims to detect earnings management activity in different industries in Malaysia by using the earnings distribution model. Further, the prospect theory and the possible influence of various industry variables are tested to understand the role of the industry in the motivation to manage earnings among firms in Malaysia. Design/methodology/approach – A sample of 538 firms from 15 different industries over the years 2005-2011 is used for this purpose. The earnings distribution model is used to detect earnings management activity across industries, and various regression techniques are used to test the influence of the prospect theory and various industry variables on earnings management activity. Findings – The findings indicate the presence of earnings management practices in Malaysian industries, but the prevalence of earnings management activity and the motivation to do so are found to differ across industries. The prospect theory is found to be a possible motivation for earnings management overall but not when industries are considered separately. Industry competitiveness, capital intensity and profitability are found to influence both motivations to manage earnings while industry leverage is found significant only in the case of motivation to manage earnings to avoid reporting losses. Finally, earnings volatility and size are insignificant in influencing the propensity to manage earnings. Originality/value – To the authors’ knowledge, this is the first study which documents the role of various industry characteristics in influencing earnings management activity. It highlights the importance of considering industry level variables in a study on earnings management and, hence, adds to the growing literature on earnings management.

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Discretionary Accruals and Earnings Management: An Analysis of Pseudo Earnings Targets

The Accounting Review ◽

10.2308/accr.2006.81.3.617 ◽

2006 ◽

Vol 81 (3) ◽

pp. 617-652 ◽

Cited By ~ 117

Author(s):

Benjamin C. Ayers ◽

John (Xuefeng) Jiang ◽

P. Eric Yeung

Keyword(s):

Earnings Management ◽

Positive Association ◽

Discretionary Accruals ◽

Cash Flows ◽

Earnings Distribution ◽

Management Incentives ◽

Discretionary Accrual ◽

Unexpected Earnings ◽

Earnings Benchmarks ◽

Earnings Targets

We investigate whether the positive associations between discretionary accrual proxies and beating earnings benchmarks hold for comparisons of groups segregated at other points in the distributions of earnings, earnings changes, and analystsbased unexpected earnings. We refer to these points as “pseudo” targets. Results suggest that the positive association between discretionary accruals and beating the profit benchmark extends to pseudo targets throughout the earnings distribution. We find similar results for the earnings change distribution. In contrast, we find few positive associations between discretionary accruals and beating pseudo targets derived from analysts-based unexpected earnings. We develop an additional analysis that accounts for the systematic association between discretionary accruals and earnings and earnings changes. Results suggest that the positive association between discretionary accruals and earnings intensifies around the actual profit benchmark (i.e., where earnings management incentives may be more pronounced). We find similar effects around the actual earnings increase benchmark. However, analogous patterns exist for cash flows around the profit and earnings increase benchmarks. In sum, we are unable to eliminate other plausible explanations for the associations between discretionary accruals and beating the profit and earnings increase benchmarks.

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Small-sized companies' earnings management: evidence from Italy

International Journal of Accounting and Financial Reporting ◽

10.5296/ijafr.v3i2.4191 ◽

2013 ◽

Vol 3 (2) ◽

pp. 93 ◽

Cited By ~ 3

Author(s):

Simone Poli

Keyword(s):

Earnings Management ◽

Management Practices ◽

Poor Quality ◽

The Other ◽

Financial Statement ◽

Law System ◽

Earnings Distribution ◽

Other Hand ◽

Tax Systems ◽

The One

This study explores the earnings management practices of small-sized Italian companies. Adopting the earnings distribution approach, it finds that these companies are likely to manage their earnings to achieve two earnings level targets. On the one hand, they manage their earnings to report slightly positive earnings. Those with negative earnings manage them upward to be above the zero threshold. Those with positive earnings manage them downward to bring them close to zero. On the other hand, they manage their earnings to minimize earnings changes. The main implication of the findings of this study is that the small-sized Italian companies’ earnings are not unconditionally informative regarding their performance. In other words, they are of poor quality. As a result, they should be interpreted with caution by those who use financial statement information. This study mainly enriches the literature on earnings management in two ways. Firstly, it provides evidence on small-sized companies’ earnings management practices which are very little explored in literature. Secondly, it provides additional evidence on the earnings management practices undertaken in the Italian setting, and so in countries which are characterized by a code law system and a close alignment between accounting and tax systems.

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