TY  - JOUR
AB  - Purpose The purpose of this study is to refine what is characterized as real earnings management. Research on real earnings management (REM) has expressed concerns that firms deviating from normal business practices may endure a negative impact on future performance. Not all studies have, however, found a negative impact of REM on future performance. As a consequence, a new stream of research is emerging that examines whether actions that would mechanically be identified as REM are truly earnings management or are simply efficient business activities. The authors further this stream of inquiry by identifying factors, i.e. restructurings and expectations of future sales growth, that can be useful in making a distinction between earnings management and “just business”.Design/methodology/approach To measure REM, the authors rely on two of the proxies of Roychowdhury (2006), abnormal discretionary expenses and abnormal production costs, and regress interactions of these with measures of restructurings and expectations of future sales growth, on future performance.Findings The authors find that when they control for restructurings, reductions in discretionary expenses that would ordinarily be indicative of REM are instead associated with improved future return-on-assets and security returns. They further find that when they control for future sales growth, overproduction is also associated with improved return on sales as it is with future increases in cost of goods sold.Originality/value Together, the results may explain the contradictory results presented in prior research with respect to the impact of REM on future performance – that is, some of what has been identified as REM in prior studies may, in fact, be “just business”.
VL  - 9
IS  - 3
SN  - 1757-6385
DO  - 10.1108/JFEP-09-2016-0065
UR  - https://doi.org/10.1108/JFEP-09-2016-0065
AU  - Pacheco Paredes Angel Arturo
AU  - Wheatley Clark
PY  - 2017
Y1  - 2017/01/01
TI  - Real earnings management or “just business”
T2  - Journal of Financial Economic Policy
PB  - Emerald Publishing Limited
SP  - 268
EP  - 283
Y2  - 2024/04/19
ER  -