scholarly journals The Economic Effects of Earnings Management Pre- and Post-SOX

2020 ◽  
Author(s):  
Terry W. Mason ◽  
Richard M. Morton
Keyword(s):  
Earnings Management ◽  
Firm Value ◽  
Management Strategies ◽  
Discretionary Accruals ◽  
Economic Effects ◽  
Real Earnings Management ◽  
High Profile ◽  
Accounting Scandals ◽  
Financial Oversight

Research suggests that following several high-profile accounting scandals and the passage of SOX legislation in 2002, firms substituted real earnings management strategies for accrual manipulation. However, the broader implications of this trade-off from a public policy and financial oversight perspective are not well understood. Consistent with our expectations, we find that abnormal operating decisions are less informative about future ROA in the post-SOX period. We also find that the increase in real earnings management negatively impacts firm value, but investors appear slow to recognize and price the myopic behavior. We do not observe a corresponding increase in the quality of discretionary accruals after SOX, but market mispricing of abnormal accruals essentially disappears, consistent with greater investor scrutiny. Although the shift away from accrual manipulation to real earnings management should result in less distortion of underlying economic events, the net effect appears to be value destroying for the average firm.

scholarly journals Business cycles and earnings management strategies: a study in Brazilian public firms,

2019 ◽  
Vol 30 (80) ◽  
pp. 216-233 ◽  
Author(s):  
Edilson Paulo ◽  
Renato Henrique Gurgel Mota
Keyword(s):  
Business Cycles ◽  
Business Cycle ◽  
Earnings Management ◽  
Management Strategies ◽  
Accounting Information ◽  
Discretionary Accruals ◽  
Real Earnings Management ◽  
Economic Environment ◽  
Opportunistic Behavior ◽  
The Business Cycle

ABSTRACT This study contributes to the literature dealing with the influence of macroeconomic factors on accounting information quality, since it analyzes the earnings management strategies of firms, specifically identifying different discretionary behaviors among economic cycles: 1) different levels of earnings management through accruals between phases of the business cycle, and 2) the trade-off between earnings management through accruals and real earnings management. The results indicate that the accounting information reported should be analyzed with greater caution by its users, especially in periods of great economic oscillations, when managers can increase or reduce opportunistic behavior. The research population comprised non-financial companies with shares traded on the São Paulo Stock, Commodities, and Futures Exchange (BM&FBovespa) and the sample was composed of 247 firms per year, covering the period from 2000 to 2015 and totaling 2,501 observations. The phases of business cycles were used as a proxy for the economic environment and were based on Schumpeter's (1939) study, which divides an business cycle into four distinct phases: expansion, recession, contraction, and recovery. Discretionary accruals were estimated according to the Pae (2005) and Paulo (2007) models. Real earnings management was estimated as described by Roychowdhury (2006), using only the abnormal behavior of production costs and operational decisions. The results of this research show that earnings management strategies, using either accruals or real manipulation, as well as the choice between these strategies, are impacted by the economic environment. The evidence suggests that managers have different opportunistic behavior in each phase of the business cycle. Specifically, they increase the level of discretionary accruals in contractionary phases and reduce it during recoveries, while they manage earnings downwards via real manipulation in recessions and contractions.

scholarly journals KUALITAS AUDIT SEBAGAI PEMODERASI PENGARUH MANAJEMEN LABA TERHADAP NILAI PERUSAHAAN

2020 ◽  
Vol 3 (2) ◽  
pp. 174-190
Author(s):  
I Putu Edi Darmawan
Keyword(s):  
Earnings Management ◽  
Firm Value ◽  
Audit Quality ◽  
Stock Exchange ◽  
Sampling Technique ◽  
Discretionary Accruals ◽  
Real Earnings Management ◽  
Manufacturing Companies ◽  
Negative Effect ◽  
The Impact

This study aims to test and analyze the impact of accrual earnings management and real earnings management on firm value empirically. Also, audit quality's role on the effect of accrual earnings management and total earnings management on firm value. The analytical method used is Moderated Regression Analysis (MRA). This research's population is manufacturing companies listed on the Indonesia Stock Exchange during the period 2013 to 2017. The sampling technique used is purposive sampling. This study found that accrual earnings management, which is proxied by discretionary accruals, positively affects firm value. Real earnings management has a negative effect on firm value. Audit quality cannot weaken the effect of accrual earnings management on firm value. However, audit quality weakens the effect of real earnings management on firm value.

scholarly journals THE EFFECT OF GOVERNANCE QUALITY AND EARNING MANAGEMENT WITH INTERNAL CONTROL AS MODERATING VARIABLE TOWARDS FIRM VALUE

2020 ◽  
Vol 1 (2) ◽  
pp. 192-200
Author(s):  
Mufidah Mufidah ◽  
Ira Febrianti ◽  
Masnun Masnun
Keyword(s):  
Corporate Governance ◽  
Statistical Analysis ◽  
Earnings Management ◽  
Internal Control ◽  
Firm Value ◽  
Real Earnings Management ◽  
Internal Control System ◽  
Quality Of Governance ◽  
Governance Quality

The purpose of this study is to analyze the influence of the quality of corporate governance, real earnings management on firm value and to analyze the influence of the quality of corporate governance with the internal control system as a moderating variable on firm value in companies included in the LQ 45 index 2016-2018. The data in this study used descriptive statistical analysis and inferential statistical analysis. The results showed that the Quality of Governance had no significant effect on Firm Value, Earnings Management had a significant effect on Firm Value and Internal Control could not moderate the effect of Governance Quality on Firm Value.

scholarly journals The Effect Of Short-Term Debt On Accrual Based Earnings Management And Real Earnings Management

2016 ◽  
Vol 32 (4) ◽  
pp. 1287-1300
Author(s):  
Sun-young Park
Keyword(s):  
Earnings Management ◽  
Financial Institutions ◽  
Liquidity Risk ◽  
Discretionary Accruals ◽  
Debt Financing ◽  
Real Earnings Management ◽  
Financing Constraints ◽  
Total Current ◽  
Short Term ◽  
Management Method

This study investigates whether short-term debt is related to earnings management. Short-term debt is divided into total current liabilities, debt in current liabilities and short-term borrowings. In addition, this study examines how short-term debt is related to how firms manage their earnings. I use discretionary accruals and real operating decisions as the earnings management method. The study finds that debt in current liabilities only has a statistically significant impact on accrual earnings management, and short-term borrowings are only shown to have a statistically significant impact on real earnings management. These results indicate that managers engage in accrual earnings management of debt included in current liabilities and use real earnings management of short-term borrowings from financial institutions.Therefore, this evidence indicates that managers engage in accrual earnings management of debt in included current liabilities when they face the liquidity risk of short-term debt, and the firms with debt financing constraints are likely to manage real earnings in spite of enhanced firm monitoring by lenders such as financial institutions. The findings in this study may have implications in the debate about the monitoring function of financial institutions such as banks.

scholarly journals Political and financial background in board interlocking and earnings management in Brazil

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Cristian Baú Dal Magro ◽  
Roberto Carlos Klann
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Financial Reporting ◽  
Management Practices ◽  
Accounting Information ◽  
Real Earnings Management ◽  
The Political ◽  
Content Type ◽  
Quality Of Accounting Information

Purpose Although board interlocking underlying forces are largely hidden, the purpose of this paper is to provide managers, auditors, analysts, regulators and other stakeholders with sociological board interlocking information considering the different backgrounds of their members. Design/methodology/approach The research sample gathered 1,606 observations from 2010 to 2017. For data analysis, the direct and indirect board interlocking linkages, considering the different backgrounds of board members, established the centrality indicators. Subsequently, the authors used these indicators according to each measured background in the regression models. Findings The results indicate that the political background of board interlocking members is positively related to real earnings management practices, while the financial background has a mitigating effect on such practices. Research limitations/implications The findings suggest that individual skills and interests conveyed across the corporate social network have shaped corporate governance, with distinct impacts on the quality of accounting information. Practical implications The authors conclude that both backgrounds could have implications on agency conflicts, increasing (policy) or reducing (financial) information asymmetry between the company and its various stakeholders, which indicates that the authors must consider sociological and not just economic aspects within corporate governance. Social implications The sociological background of individuals is necessary for the congruence of monitoring mechanisms, and consequently, the quality of accounting information. Originality/value This study examines the influence of the political and financial background of board interlocking members on real earnings management practices in Brazilian publicly traded companies in the International Financial Reporting Standards post-adoption period.

Long-Term Orientation and Earnings Management Strategies

2019 ◽  
Vol 18 (3) ◽  
pp. 97-119 ◽  
Author(s):  
Jesper Haga ◽  
Fredrik Huhtamäki ◽  
Dennis Sundvik
Keyword(s):  
Earnings Management ◽  
High Precision ◽  
Management Strategy ◽  
Management Strategies ◽  
Real Earnings Management ◽  
Short Term ◽  
Country Level ◽  
Earnings Benchmarks ◽  
Jel Classifications

ABSTRACT In this study, we investigate how country-level long-term orientation affects managers' willingness to engage in earnings management and choice of earnings management strategy. Using a comprehensive dataset of 47 countries for the period from 2003 to 2015, we find that firms in long-term-oriented cultures rely relatively more on earnings management through accruals, while firms in short-term-oriented cultures engage in relatively more real earnings management. Furthermore, we find a larger discontinuity around earnings benchmarks in long-term-oriented cultures suggesting that manipulation of accruals enables benchmark beating with high precision. JEL Classifications: M14; M16; M21; M41.

The Relationship between Aggressive Real Earnings Management and Current and Future Audit Fees

2016 ◽  
Vol 36 (1) ◽  
pp. 85-107 ◽  
Author(s):  
Adam Greiner ◽  
Mark J. Kohlbeck ◽  
Thomas J. Smith
Keyword(s):  
Earnings Management ◽  
Firm Value ◽  
Audit Fees ◽  
Cash Flows ◽  
Data Availability ◽  
Real Earnings Management ◽  
Increased Risk ◽  
Pricing Behavior ◽  
Reported Earnings ◽  
The Relationship

SUMMARY We examine the relationship between aggressive income-increasing real earnings management (REM) and current and future audit fees. Managers pursue REM activities to influence reported earnings and, as a consequence, alter cash flows and sacrifice firm value. We posit that the implications of REM are considered in auditors' assessments of engagement risk related to the client's economic condition and result in higher audit fees. We find that, with the exception of abnormal reductions in SG&A, aggressive income-increasing REM is positively associated with both current and future audit fees. Additional analyses provide evidence consistent with increased effort combined with increased risk contributing to the current pricing effect, with increased business risk primarily driving the future pricing effect. We, therefore, provide evidence that aggressive income-increasing REM activities have a significant influence on auditor pricing behavior, consistent with the audit framework associating engagement risk with audit fees. JEL Classifications: G21; G34; M41. Data Availability: The data in this study are available from public sources indicated in the paper.

Audit quality and real earnings management: evidence from the UK manufacturing sector

2019 ◽  
Vol 16 (2) ◽  
pp. 165-181
Author(s):  
R.P. Sitanggang ◽  
Yusuf Karbhari ◽  
Bolaji Tunde Matemilola ◽  
M. Ariff
Keyword(s):  
Earnings Management ◽  
Significant Relationship ◽  
Firm Value ◽  
Management Practices ◽  
Audit Quality ◽  
Audit Fees ◽  
Production Costs ◽  
Real Earnings Management ◽  
Content Type ◽  
The Uk

Purpose The purpose of this paper is to investigate whether audit quality is associated with real earnings management in the UK. Design/methodology/approach The authors apply the panel fixed effects method that controls for heterogeneity across firms to investigate whether audit quality is related to real earnings management for a large sample of UK manufacturing companies for the period 2010–2013. The authors utilized three proxies to measure real earnings management and two proxies to measure audit quality. Findings The results provide evidence that audit fees are negatively related to abnormal operating cash flows. Conversely, audit fees are positively related to abnormal discretionary expenses. Besides, audit quality proxies show insignificant relationship with abnormal production costs and real earnings management index. Overall, the study finds partial evidence of significant relationship between audit quality and real earnings management. Research limitations/implications These results are important subject to the adequacy of the indicators of real earnings management and audit quality. Like previous research works that mostly focus on upward earnings management, the authors do not address the question of whether and how firms take real actions to manage earnings downwards in certain contexts. Practical implications The findings inform monitoring bodies that the imposition of higher levels of audit quality may result in unintended consequences. Therefore, monitoring bodies, such as audit committees, should consider the implication of imposing higher quality auditing, which may drive firms to potentially value-decreasing real earnings management practices. Managers should curtail real earnings management practices, especially abnormal operating cash flow, because attempt to use higher-quality auditors to mitigate such practice may destroy firm value. Also, managers’ employment may be threatened due to the potential deterioration of firm value caused by using higher-quality auditors to mitigate managers’ real earnings management practices. Moreover, shareholders are informed of the potential detrimental effects of imposing higher levels of audit quality which may lower the value of their investments. Originality/value The paper extends previous research on earnings management in several ways. First, while earlier studies usually use accruals methods to measure earnings management, the authors use the real earnings management approach as managers can switch from accruals to real earnings management when facing more scrutiny from auditors and/or more constrained regulations or standards that may limit their capability to use discretionary accruals. Second, this study reports new findings, as the authors find partial evidence of a significant relationship between audit quality and real earnings management. Third, it is one of the few studies to use a real earnings management index to measure earnings management and its link to audit quality.

scholarly journals Is Earnings Quality Associated with Corporate Social Responsibility? Evidence from the Korean Market

2019 ◽  
Vol 11 (15) ◽  
pp. 4116 ◽  
Author(s):  
Yoon ◽  
Kim ◽  
Lee
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Large Family ◽  
Discretionary Accruals ◽  
Sample Analysis ◽  
Socially Responsible ◽  
Weak Support ◽  
Environmentally Sensitive ◽  
Korean Market

Socially responsible firms are believed to behave in a responsible manner to restrict earnings management and thus deliver more reliable and transparent financial information to investors. We test this hypothesis by predicting a higher quality of financial reporting for socially responsible firms in the Korean market. The entire sample analysis provides evidence for the hypothesis in the use of discretionary accruals as proxy variables for the quality of financial reporting. However, our sub-sample analysis indicates that such weak support is driven by a group of environmentally sensitive firms and the affiliates of large family-owned conglomerates, or chaebol. Socially responsible firms are less likely to be involved with earnings management in the group of non-environmentally sensitive industries and non-chaebol affiliates. These firms provide a better quality of financial reporting in terms of both the use of discretionary accruals and real activity manipulations. In line with recent studies, our findings suggest that ethical concerns in producing high-quality financial reports rely significantly on firm characteristics.

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