Search results
1 – 10 of 230Ane Haugdal, Frode Kjærland, Levi Gårseth-Nesbakk and Are Oust
This study explores whether hard regulatory control decreases the level of earnings management in local governments. The implementation of a new regulatory approach by Norwegian…
Abstract
Purpose
This study explores whether hard regulatory control decreases the level of earnings management in local governments. The implementation of a new regulatory approach by Norwegian authorities provides the opportunity for an empirical study.
Design/methodology/approach
The authors adopt a two-stage strategy to investigate the existence of earnings management, using the Jones (1991) and modified Jones (Dechow et al., 1995) models to construct a random-effects model.
Findings
The authors test the hypothesis that, given decentralisation of control, there will be an increase in opportunistic financial reporting. This study's findings suggest that this is not the case, thereby indicating that a soft control regime does not diminish discipline in municipalities.
Practical implications
This study has practical implications for policymaking in the public sector. Its findings suggest that municipalities do not engage in more earnings management under a soft regulatory regime. Hence, other authorities should consider adopting a soft regulatory approach to controlling local governments and their financial reporting systems.
Originality/value
This study contributes to a growing body of literature regarding earnings management by local governments. The authors investigate a hypothesis previously untested in the literature by comparing the degree of earnings management under different regulatory control regimes.
Details
Keywords
Mohamed Esmail Elmaghrabi and Ahmed Diab
This study aims to examine the association between anti-corruption corporate disclosure and earnings management practices by bringing evidence from a developed market.
Abstract
Purpose
This study aims to examine the association between anti-corruption corporate disclosure and earnings management practices by bringing evidence from a developed market.
Design/methodology/approach
The study uses data from non-financial FTSE 100 Shares in 2016 and 2017. This study develops a disclosure index to capture the anti-corruption disclosures and run pooled, fixed effects and generalized methods of moments regression models to explore the anti-corruption disclosure–earnings management association. This study also disentangles discretionary accruals into positive and negative, use adjusted discretionary accrual computation and take a more conservative view on discretionary accruals computation as an additional analysis.
Findings
The results show a negative and significant association between anti-corruption disclosure and earnings management practices. When disentangling discretionary accruals (overvalued/positive and undervalued/negative), the authors found that higher anti-corruption disclosures were negatively associated with positive discretionary accruals, but not associated with negative discretionary accruals. The additional analysis confirmed the previous results, showing that anti-corruption disclosures are perceived as a substantive practice, rather than a mere disclosure practice for legitimacy reasons.
Originality/value
This study contributes to debate on the symbolic versus the substantive uses of anti-corruption disclosures in the UK context.
Details
Keywords
Apostolos Christopoulos, Ioannis Dokas, Christos Leontidis and Eleftherios Spyromitros
This paper attempts to investigate the effect of corruption on the real and accrual earnings management of target firms in the process of mergers and acquisitions.
Abstract
Purpose
This paper attempts to investigate the effect of corruption on the real and accrual earnings management of target firms in the process of mergers and acquisitions.
Design/methodology/approach
The sample includes target firms from the European area that participate in mergers or acquisitions announced during 2010–2020. The preliminary empirical part estimates the level of earnings management during the period two years before the deal's announcement to identify whether the sample follows the manipulation behavior that the literature suggests for target firms. The primary empirical analysis focuses on the impact of corruption on real and accrual-based earnings management proxies, employing regression models and two alternative proxies for corruption. The existing literature points out that the combination of low levels of corruption and an integrated legal system reduces earnings manipulation.
Findings
The findings provide strong evidence for systematic downwards accounting manipulation practices, whereas the findings for real earnings management are not significant. The findings of the main empirical part show that corruption is positively associated with accrual-based manipulation and negatively related to real earnings management. In essence, in economies with a high level of transparency, managers adopt the manipulation of operating activities as a less detectable practice of earnings management instead of engaging in accounting procedures.
Originality/value
This study contributes to the literature highlighting the diversification of these firms' manipulation strategies according to the national level's corruption status.
Details
Keywords
Hania Waleed Tawfik El-Feel, Diana Mostafa Mohamed, Hala Magdy Amin and Khaled Hussainey
This paper aims to provide insights into the complicated relationship between earnings management (EM) and corporate social responsibility (CSR) during the financial downturn…
Abstract
Purpose
This paper aims to provide insights into the complicated relationship between earnings management (EM) and corporate social responsibility (CSR) during the financial downturn caused by the COVID-19 pandemic.
Design/methodology/approach
Parametric t-tests and non-parametric Wilcoxon rank-sum tests accompanied by ordinary least squares regression analysis, augmented with Newey–West procedure approaches, are used for a sample that consists of 1,984 firms from 47 countries for the period of 2014–2020. EM was proxied once with discretionary accruals using the modified Jones model (1995) and once with real earnings management (REM) using the Roychowdhury model (2006). This study uses environmental, social, and governance scores from the Thomson Reuters database as a proxy for CSR.
Findings
The results reveal that firms tend to engage more in EM practices during the pandemic and that more socially responsible firms tend to be honest and transparent during the financial reporting process. Interestingly, it was found that more socially responsible firms engaged less in REM practices during the pandemic.
Research limitations/implications
The findings of this research help lenders, investors, policymakers and managers gain a better understanding of EM practices during a negative shock and shed light on the importance of CSR in being ethical.
Originality/value
The findings extend both the literature on the role of CSR in promoting financial reporting quality and the literature on the impact of COVID-19 on accrual and REM practices.
Details
Keywords
Syed Zulfiqar Ali Shah and Fangyi Wan
This study examines whether country-level financial integration affects firms' accounting choices and the quality of financial information.
Abstract
Purpose
This study examines whether country-level financial integration affects firms' accounting choices and the quality of financial information.
Design/methodology/approach
This study employs Propensity Score Matching (PSM), and panel regressions of a large sample of data from 20 emerging markets over the period 1987–2018.
Findings
This study finds evidence that increased level of financial integration is significantly positively associated with firms' accruals earnings management (AEM) and real earnings management (REM).
Research limitations/implications
Findings in the study have implications for standard-setting bodies that aim to enhance the usefulness of financial reporting quality. The study also has implications for various initiatives by governments in emerging markets aimed at raising investor confidence and fostering stock market development through greater financial integration.
Practical implications
Findings in the study have implications for standard-setting bodies that aim to enhance the usefulness and quality of financial reporting. The findings can be of interest to analysts, auditors and other monitoring institutions who play a crucial role in detecting earnings management and reducing information asymmetry. Finally, the study has implications for various initiatives by governments in emerging markets aimed at raising investor confidence and fostering stock market development through greater financial integration.
Originality/value
Findings in the study reveal how country-level financial integration affects accruals and real earnings management in a sample of firms from 20 emerging markets. Further, the study adds to the growing body of literature on emerging markets where capital markets mechanisms, regulatory environment and firm's corporate governance are distinct to developed markets.
Details
Keywords
This study examines specific budget execution items (as proxies of vulnerability and sustainability) along with political factors to identify earnings management (EM) practices in…
Abstract
Purpose
This study examines specific budget execution items (as proxies of vulnerability and sustainability) along with political factors to identify earnings management (EM) practices in Greek municipalities.
Design/methodology/approach
The study employs a sample of 1,831 financial and budget execution statements for the period 2011–2019. EM is proxied by unsigned discretionary accruals that are assessed through the performance-matched modified-Jones model and the modified-Jones model.
Findings
The findings provide evidence that the municipality’s dependence on subsidies (or its self-sufficiency) affects EM, especially during the pre-election year. Municipalities that maintain their financial autonomy engage less in EM in pre-election years. Lastly, it is proven that electoral cycles, weak opposition and other variables exert an effect on the size of EM. Sensitivity analysis confirms the results.
Originality/value
This paper contributes to the literature on EM by analyzing for the first time budget execution items (as proxies of vulnerability and sustainability) and their impact on the size of unsigned discretionary accruals.
Details
Keywords
The aim of this paper is to investigate whether Mayors in Portugal engage in earnings management close to zero with the motivation of re-election.
Abstract
Purpose
The aim of this paper is to investigate whether Mayors in Portugal engage in earnings management close to zero with the motivation of re-election.
Design/methodology/approach
The data used in this study were annual financial information from Portuguese municipalities from 2005 to 2016, as well as data on elections and Mayor re-elections involving three political cycles. The methodologies employed were quantitative, including graphical and panel data regressions.
Findings
The results indicate that municipalities used discretionary accruals to engage in earnings management to report net earnings close to zero, and re-election seems to be a motivation for earnings management behaviour. Furthermore, the results suggest that municipalities in which the Mayor is re-elected are less likely to report positive net earnings close to zero.
Originality/value
This paper makes a valuable contribution to the literature on earnings management in municipalities. At the theoretical level, it makes it possible to identify whether re-election is a motivation for earnings management and, in this sense, to identify patterns of behaviour by managers. On a practical level, the knowledge of a manager's behaviour patterns will help to anticipate his or her future behaviour and, consequently, may prevent inefficiencies.
Details
Keywords
Charlotte Haugland Sundkvist and Tonny Stenheim
The purpose of this paper is to examine the effect on earnings quality in private firms caused by a negative shock to fundamental performance, while simultaneously addressing…
Abstract
Purpose
The purpose of this paper is to examine the effect on earnings quality in private firms caused by a negative shock to fundamental performance, while simultaneously addressing methodological challenges measuring fundamental performance present in prior accrual-based earnings management literature.
Design/methodology/approach
Fundamental performance is unobservable and, therefore, difficult to measure. Existing research has used proxies that are subject to estimation errors and endogeneity concerns (e.g. DeFond and Park, 1997, Balsam et al., 1995). This study attempts to overcome these issues by taking advantage of the exogenous shock in oil price which occurred in 2014 and by using a difference-in-differences approach to investigate the effect on earnings management caused by a negative shift in fundamental performance.
Findings
The results suggest that a negative shock in fundamental performance, indicated by the oil price shock in 2014, reduces earnings quality. This result holds for various robustness tests such as the use of propensity score matching, and the inclusion of firm fixed effects. Additional analysis suggests that the reduction in earnings quality is driven by an increase in positive discretionary accruals, suggesting that managers of private firms experiencing poor performance manage earnings upwards to conceal true performance.
Originality/value
This study contributes to the literature by examining the effect of a negative shock to performance in a setting of private firms and by addressing methodological challenges in prior literature. Private firms are fundamentally different from public firms, with the consequence that results from public firms may not be generalizable to private firms (e.g. Hope et al., 2012, Burghstahler et al., 2006, Ball and Shivakumar, 2005).
Details
Keywords
Justin G. Davis and Miguel Garcia-Cestona
Motivated by rapidly increasing CEO age in the USA, the purpose of this study is to analyze the effect of CEO age on financial reporting quality and consider the moderating role…
Abstract
Purpose
Motivated by rapidly increasing CEO age in the USA, the purpose of this study is to analyze the effect of CEO age on financial reporting quality and consider the moderating role of clawback provisions.
Design/methodology/approach
This study uses a data set of 18,492 US firm-year observations from 2003 to 2019. Financial reporting quality is proxied with accruals-based and real activities earnings management measures, and with financial statement irregularities, measured by applying Benford’s law to financial statement line items. A number of sensitivity tests are conducted including the use of an instrumental variable.
Findings
The results provide evidence that financial statement irregularities are more prevalent when CEOs are older, and they suggest a complex relation between CEO age and real activities earnings management. The results also suggest that the effect of CEO age on financial reporting quality is moderated by the presence of clawback provisions which became mandatory for US-listed firms in October 2022.
Originality/value
This study is the first, to the best of the authors’ knowledge, to consider the effect of CEO age on financial statement irregularities and earnings management. This study has important implications for stakeholders evaluating the determinants of financial reporting quality, for boards of directors considering CEO age limitations and for policymakers considering mandating clawback provisions, which recently occurred in the USA.
Details
Keywords
Giovanna Gavana, Pietro Gottardo and Anna Maria Moisello
The purpose of this paper is to investigate the effect of family control on the association between related party transactions (RPTs) and different forms of accrual-based earnings…
Abstract
Purpose
The purpose of this paper is to investigate the effect of family control on the association between related party transactions (RPTs) and different forms of accrual-based earnings management (AEM) and real earnings management (REM), analyzing the effect of board characteristics on the possible association.
Design/methodology/approach
This paper studies a sample of Italian non-financial listed firms over the 2014–2019 period, by GLS regression models, controlling for the fixed effects of the company's sector of operation and the year.
Findings
Results indicate a different association between RPTs and earnings management (EM) in family and non-family firms. They point out that family firms use RPTs in association with downward AEM and REM perpetrated by abnormal discretionary expenses as well as a substitute of REM via abnormal production costs. For non-family firms, findings indicate only a substitution effect between RPTs and AEM. Furthermore, CEO duality, board gender diversity and the presence of the family on the board positively moderate the association between RPTs and, respectively, REM implemented through sales manipulations, downward AEM and upward AEM.
Originality/value
This study suggests that the socioemotional wealth (SEW) differently affects the relationship between RPTs and EM, according to the form of the latter. It also points out family firms' heterogeneity in earnings manipulations, by providing evidence of the moderating role of board characteristics on the association between RPTs and the various forms of EM.
Details