Search results

This paper undertakes an extensive and systematic review of the literature on earnings management (EM) over the past three decades (1992–2022). Furthermore, the study identifies emerging research themes and proposes future avenues for further investigation in the realm of EM.

For this study, a comprehensive collection of 2,775 articles on EM published between 1992 and 2022 was extracted from the Scopus database. The author employed various tools, including Microsoft Excel, R studio, Gephi and visualization of similarities viewer, to conduct bibliometric, content, thematic and cluster analyses. Additionally, the study examined the literature across three distinct periods: prior to the enactment of the Sarbanes-Oxley Act (1992–2001), subsequent to the implementation of the Sarbanes-Oxley Act (2002–2012), and after the adoption of International Financial Reporting Standards (2013–2022) to draw more inferences and insights on EM research.

The study identifies three major themes, namely the operationalization of EM constructs, the trade-off between EM tools (accrual EM, real EM and classification shifting) and the role of corporate governance in mitigating EM in emerging markets. Existing literature in these areas presents mixed and inconclusive findings, suggesting the need for further theoretical development. Further, the study findings observe a shift in research focus over time: initially, understanding manipulation techniques, then evaluating regulatory measures, and more recently, investigating the impact of global accounting standards. Several emerging research themes (technology advancements, cross-cultural and cross-national studies, sustainability, behavioral aspects and non-financial indicators of EM) have been identified. This study subsequent analysis reveals an evolving EM landscape, with researchers from disciplines like data science, computer science and engineering applying their analytical expertise to detect EM anomalies. Furthermore, this study offers significant insights into sophisticated EM techniques such as neural networks, machine learning techniques and hidden Markov models, among others, as well as relevant theories including dynamic capabilities theory, learning curve theory, psychological contract theory and normative institutional theory. These techniques and theories demonstrate the need for further advancement in the field of EM. Lastly, the findings shed light on prominent EM journals, authors and countries.

This study conducts quantitative bibliometric and thematic analyses of the existing literature on EM while identifying areas that require further development to advance EM research.

To investigate whether acquiring firms listed in the Athens Stock Exchange, that completed mergers and acquisitions during the period 2001‐2003, tend to manipulate accounting earnings upward prior to the initiation and completion of the transaction.

The focus is on discretionary accruals as a measure of managers' earnings manipulation. To estimate discretionary and non‐discretionary components of total accruals the time series Jones model is adopted.

Results provide weak evidence of biased accruals reported by managers in the year preceding the announcement and the completion of the deal. The results seem to agree with those of Erickson and Wang who found no evidence of pre‐merger earnings management by a sample of acquiring firms that were involved in cash mergers.

The model applied, even if it is considered effective in discriminating abnormal from normal accruals, has been shown to have certain deficiencies, while simultaneously the time series data and number of firms used here could be considered as small. Within the aforementioned limitations further research could examine the effect of mergers and acquisitions in the stock price of the acquiring of target firms and the possibility of earnings management by target firms, since target managers may have different incentives to manipulate earnings.

Findings are of particular interest to Greek regulators for policy‐making purposes as well as to investors in the Greek capital market.

To the best of one's knowledge this is the first study to examine earnings management by acquiring firms in the European capital market context.

This study analyses the engagement of Greek municipalities in earnings management activities through the manipulation of their accrual accounts. It aims at identifying whether discretionary accruals are associated with certain financial sustainability measures calculated through financial statement numbers.

To test the hypotheses, the annual financial data of Greek municipalities for the period 2011–2018 are used. The final sample corresponds to an unbalanced panel data sample that includes 1,565 yearly observations. Total accruals and discretionary accruals modelling are based both on the aggregate Jones model and the modified Jones model.

The findings provide evidence that Greek municipalities engage in earnings management practices through the manipulation of accruals. Moreover, there is corroborative evidence that financial sustainability indicators, such as indebtedness, liquidity and efficiency ratios, are related to the magnitude of earnings management, while earnings management behaviour during the year preceding the municipal elections is more intense.

The paper expands the literature in earnings management in local governments by analysing the relation of financial sustainability indicators to this behaviour.

The purpose of this paper is to investigate the individual and interaction effects of chief executive officers (CEO)-chairman leadership structure (CEO duality) and CEO-serviced early years (the first three years in office) on real earnings management (REM) through sales activities of listed firms in the Stock Exchange of Thailand (SET).

The longitudinal data on CEO and chairman names of 3,825 firm-year observations were manually gleaned from the SET market analysis and reporting tool and the annual reports from 2001 to 2015. Multiple regressions were utilized to analyze the effects.

The findings show a positive relationship between CEO duality and sales-driven REM. However, the CEO-serviced early years have no association with sales-driven REM. The CEO duality/serviced early year interaction effect is positively correlated to sales manipulation. In addition, firms with the CEO duality engage in upward or downward sales-driven REM, while firms with newly appointed CEO adopt only the upward sales-driven REM. In firms which their newly appointed CEO concurrently serves as chairman, either upward or downward sales-driven REM strategy is introduced.

The findings provide some grounds for capital market and regulators to exercise caution when it comes to firms with the newly appointed CEO and/or the CEO duality, given a high tendency to manipulate sales revenues.

This study is the first to investigate the relationship between the CEO duality/serviced early years on sales-driven REM. The findings are expected to complement existing publications on REM.

This study aims to examine the use of real activities manipulation by firms implicated in the stock option backdating scandal.

The real activity manipulation measures are as follows: abnormal R&D expense, abnormal SG&A expense, abnormal production cost and abnormal cash flow from operations. Using a sample of firms alleged to have backdated options during the period 1998-2006 and non-backdating one-on-one matched firms, a separate regression is run for each of the real activity manipulation measures (dependent variables) on backdating and other variables.

The authors report unusually low R&D and unusually low SG&A expenses among the backdating firms. They also find evidence of unusually high production costs among backdating firms compared to the matched firms.

The findings imply that backdating firms are more aggressive in the use of real activities to manipulate earnings and the use of real activities appears to be opportunistic.

The study contributes to the literature by providing evidence of the use of real activities manipulation by firms under investigation for fraud. The authors also add to the debate on whether the use of stock options as part of compensation aligns the interest of management with the interest of shareholders.

The main aim of this study was to examine the earnings management behaviours, including both accrual-based and cash flow-based earnings management, of Chinese firms during the Global Financial Crisis (GFC).

A data set of 1,392 firm-year observations derived from a large sample of China's top listed firms (based on total assets) was constructed and investigated via univariate and ordinary least squares regression analyses.

Two distinct conclusions can be drawn from the results of the study. First, the top Chinese listed firms did engage in earnings management, as indicated by comparisons of the means of the absolute values of both accrual-based and cash flow-based earnings management indicators in the periods before and after 2008 when the GFC started. Second, investigation of earnings management directions revealed that in response to the GFC, the firms from construction-related industries and the airline industry manipulated earnings upwards through either accrual-based and/or cash flow-based earnings management activities. On the other hand, firms in the household durables industry engaged in earnings-reducing activities. These findings reflect the effect of the stimulus package launched by the Chinese Government in an effort to combat the GFC. In addition, the results indicate that firm characteristics such as size, leverage, profitability and growth affected the earnings management behaviours of the firms analysed in the study.

The empirically derived findings of this study contribute to the literature pertaining to the effects of the GFC on earnings management practices in China, which has remained relatively scant to date.

Barton and Simko argue that the balance sheet information would serve as a constraint on accrual‐based earnings management. This paper aims to extend their argument by examining whether the balance sheet constraint increases managers' propensity to use either downward forecast guidance or real earnings management as a substitute mechanism to avoid earnings surprises.

Following Barton and Simko, the paper uses the beginning balance of net operating assets relative to sales as a proxy for the balance sheet constraint. The argument is that because of the articulation between the income statement and the balance sheet, previous accounting choices that increase earnings will also increase net assets and therefore the level of net assets reflects the extent of previous accrual management. Models from Matsumoto and Bartov et al. are used to measure forecast guidance. Following Rochowdhury and Cohen et al., a firm's abnormal level of production costs and discretionary expenditures are used as proxies of real earnings management. The empirical analysis is conducted based on the 1996‐2006 annual data for a sample of nonfinancial, nonregulated firms.

The paper finds that firms with higher level of beginning net operating assets relative to sales are more likely to guide analysts' earnings forecasts downward, and more likely to engage in real earnings management in terms of abnormal increases in production costs and abnormal reductions in discretionary expenditures.

Overall, the paper's evidence suggests that managers turn to real earnings management or downward forecast guidance as a substitute mechanism to avoid negative earnings surprises when their ability to manipulate accruals upward is constrained by the extent to which net assets are already overstated in the balance sheet.

This study adds to prior literature that examines how managers trade off different mechanisms used to meet or beat analysts' earnings expectations. It also contributes to the extant literature by providing further insights on the role of balance sheet information in the process of managing earnings and/or earnings surprises.

This study examines how lenders modify their behavior and their use of traditional, transaction-based lending models in credit decisions when faced with low earnings quality.

To measure the earnings quality, following Bharath, Sunder and Sunder (2008), the authors use three measures of accrual quality and combine them into a simple parsimonious measure of accrual quality. Subsequently, the authors apply the incremental R-square approach used by Kim and Kross (2005) to determine the degree to which lenders modify their reliance on financial statement ratios when faced with low accrual quality.

Consistent with prior literature, this study shows that the cost of debt is higher when accrual quality is low. In addition, this study extends prior literature by showing that lenders decrease their reliance on income statement data to make credit decisions as accrual quality decreases.

This paper broadens existing literature on the pricing of information risk in capital markets by being the first to show that lenders modify their reliance on financial statement data when faced with low-quality accruals. In addition, this paper extends the findings of Billings and Morton (2002) and demonstrates to managers the futility of using accrual manipulations to obtain more favorable credit terms. Lastly, this paper aids regulators and standard setters who seek to improve the usefulness of financial statements by showing that creditors do not appear to be misled by reporting choices that lower the quality of accruals.

The authors propose an alternative robust technique to test for discontinuities in distributions and provide consistent evidence of discontinuities around zero for both scaled and unscaled earnings levels and changes. The advantage of the proposed test is that it does not rely on arbitrary choice of bin width choices.

To evaluate the power of the test, the authors examine the density function of non-discretionary earnings and detect no evidence of discontinuities around zero in levels and changes of these non-discretionary earnings. As robustness, the authors use pre-managed earnings excluding accrual and real manipulation and find similar evidence.

The finding using our technique support the Burgstahler and Dichev (1997) interpretation on earnings management, even for smaller sample sizes and reject the theory that discontinuities arise from scaling and sampling methods.

The study provides an overview of those studies that support and those that oppose using “testing for discontinuities” as a way to examine earnings management. The authors advance the literature by providing an alternative methodology supporting the view that the kink in the distribution represents earnings management.

The authors examine whether internal corporate governance mechanisms are effective in curbing cash flow manipulation through real activities, misclassification, and timing.

The sample comprises of firms from an emerging market, India with data for years 2004 through 2015. The authors use the methodology given in Roychowdhury (2006).

The authors find that corporate boards in India play an active role in curbing cash flow manipulation through real activities but fail to control cash flow manipulation through misclassification and timing.

The study suggests that corporate boards should pay more attention to the reported cash flow numbers. Regulators can reduce the opportunities available for cash flow misclassification by fixing relevant accounting and governance norms. Auditors can also help by critically focusing on the cash flow classifications presented by management.

This study, to the authors’ knowledge, is the first study that talks about the role of internal governance in a trade-off between different cash flow manipulation techniques.