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This study examines the rarely investigated association between institutional ownership and income smoothing. The results support the predicted positive association between institutional ownership and the likelihood of firms smoothing earnings towards their earnings trend in general. However, this association is not systematic across all firms. The positive association is most evident among profit firms with pre‐managed earnings above their earnings trend. No significant association is found for profit firms with pre‐managed earnings below their earnings trend and loss firms in general. This study also finds that, in Australia, while institutional ownership has a non‐linear association with income increasing earnings management (Koh, 2003), such association manifests itself within the income smoothing framework. The results of this study highlight the complexities in the association between institutional ownership and earnings management strategies, and future research can benefit by explicitly examining the trade‐offs between alternative earnings management incentives and the factors that affect the relative strength of these incentive trade‐offs.

The purpose of this paper is to empirically investigate the phenomenon of earnings management in the Egyptian initial public offerings (IPO) market where most of the IPOs were the privatisations of state‐owned enterprises (SOEs).

Using a sample of 59 Egyptian IPOs, the extent of earnings management was computed using a modified cross‐sectional version of Jones’ model.

The initial results do not provide support for the hypothesis that Egyptian IPO firms tend to overstate their earnings before the IPO date. However, when the sample firms were classified under two groups based on the pre‐IPO discretionary accruals, the results illustrate that most privately‐owned companies were found among those which contemplate to aggressively manage earnings upwards in order to maximise the IPO proceeds, whereas privatised public enterprises were found with no systematic pattern of earnings manipulation. The results also demonstrate that pre‐offering discretionary accruals do not explain the post‐offering underperformance in earnings but predict a portion of the subsequent poor share returns performance.

The findings could be of assistance to all those involved in IPOs, such as the regulatory authorities and the primary and secondary market investors.

With a few exceptions, most of the literature on earnings management has been based on the US data. Therefore, it is hoped that undertaking a research in a country such as Egypt, where the shareholding structures of most Egyptian IPO companies were concentrated in the hands of the state before going public, may reveal a different perception of earnings management and help determine whether this setting would lead to a higher or lower propensity for earnings management.

The purpose of this paper is to examine whether the contracting incentives (i.e. bonus plans, debt covenants, political costs hypotheses), and income smoothing can explain accounting choices in an emerging country, Egypt.

The paper uses the ordinary least square regression model to examine the relationship between earnings management and reporting objectives. A sample of 438 non-financial firms listed on the Egyptian Exchange over the period 2005-2007 is used.

The paper finds that the contracting objectives explain little of the variations in accounting choices (i.e. discretionary accruals) in the Egyptian context. However, the paper finds that mangers are likely to smooth the reported earnings by managing the accrual component in an attempt to reduce the fluctuation in reported earnings by increasing (decreasing) earnings when earnings are low (high) in attempt to reduce the variability of the reported earnings.

The empirical results rely on the ability of earnings management proxies to adequately capture earnings manipulation activities.

The findings of the study should be of substantial interest to regulators and policy makers. The results implicitly contribute to the ongoing argument in relation to the optimal flexibility permitted by standard setting and the argument that tightening the accounting standards and mandating International Financial Reporting Standards are likely to improve reporting quality and reduce opportunistic earnings management. The results reveal that many of the weaknesses related to corporate reporting in emerging countries may result from the inadequate enforcement of the law and the weak legal protection of minority shareholders. The results also highlight the crucial role of understanding the reporting incentives, which is mainly shaped by institutional and market forces and the legal environment, in explaining accounting choices.

Unlike previous studies that tested an individual objective, this study examines the trade-offs among various reporting objectives in an emerging economy.

The purpose of this paper is to investigate how accounting is used to disguise and carry out money laundering activities in specific socio-economic and political contexts and whether discretionary accruals can provide evidence of such illicit practices performed through legally registered Mafia firms (LMFs).

The study is based on a sample of 224 Italian firms identified as LMFs, due to having been confiscated by judicial authorities because of their owners being accused of Mafia-type association. Using a multivariate regression model, specifically developed discretionary accrual proxies for LMFs are compared with those of a population of lawful firms (LWFs).

The results reveal that in the pre-confiscation years, LMFs manage aggregate, revenue and expense accruals more than LWFs do, in order to smooth earnings and disguise/carry out money laundering. In contrast, in the post-confiscation years, there is no significant difference in the level of accrual management between LMFs and LWFs, as a consequence of the effective intervention of legal administrators.

This study adopts discretionary revenue and expense accrual proxies that provide additional insight into the simultaneous manipulation of revenues and expenses, linked to money laundering, which may not be fully detected by traditional aggregate accrual models. Furthermore, it suggests that the incentive for LMFs to manage accruals may be fostered by the irrelevance of their financial statements to trades with stakeholders. Finally, this paper may provide regulators with financial accounting signals which could be included in risk assessment models aiming to detect money laundering activities within firms.

The purpose of this paper is to propose a new measure of earnings management flexibility based on the limits of the allowable set of accruals, prior discretionary accruals used, and the reversal rate of these accruals.

Quarterly financial data from Compustat for the period 1990‐2009 were used to construct the flexibility measure. Then the author examined how well this measure captures flexibility by investigating its effect on a firm's probability of meeting analysts' forecasts.

The results show that this flexibility measure better captures the firm‐specific flexibility than that of Barton and Simko which captures mainly the difference in flexibility across industries. Further, the positive effect of their measure on a firm's probability of meeting/beating analysts' forecasts is not observed in the extended sample period.

The flexibility measure proposed here can assist investors, analysts, or researchers to compare earnings management flexibility across firms in the same industry, which is useful in evaluating the quality of a firm's financial reports, stock picking or credit granting decisions.

This paper contributes to the earnings management literature by incorporating both the variation in flexibility used and that in flexibility limits. Second, evidence in this paper suggests that while financial benefits motivate managers to undertake earnings management, flexibility determines the extent of earnings management they can undertake. Third, this study points out that the unreversed discretionary accruals impose a constraint on the level of discretionary accruals a manager can incur in the current period, and hence have an indirect influence on current reported earnings.

The Sarbanes‐Oxley Act (SOX) mandated a variety of corporate governance mechanisms to improve the transparency of financial reporting quality. This paper's aim is to investigate whether SOX's recently mandated disclosure of corporate governance structures affects the market's perception of earnings informativeness and firms' earnings management.

Since the first compliant disclosure of the Act would be found in firms' 2002‐2003 financial reports, the authors retrieve the post‐SOX data (pre‐SOX data) from the 2002 to 2003 (2001‐2002) period. Further, the study adopts Anderson et al.'s model to test the relations between earnings informativeness, audit committee independence, and other corporate governance variables. A similar mode is used by Chang and Sun in their study of cross‐listed foreign firms. To measure the discretionary accruals, the authors adopt Kothari et al.'s model and use the two‐digit SIC code in the cross‐sectional regression.

It is found that the market valuation of earnings surprises is significantly higher for firms which disclose stronger corporate governance functions. It is also found that the effectiveness of corporate governance in monitoring earnings management is improved after the mandated disclosure.

The empirical evidence shows that the quality of accounting earnings is increased after the SOX's mandated disclosure, which strengthens the link between financial reporting and corporate governance functions.

The purpose of this paper is to examine the relationships between earnings management (EM) and subsamples of corporate environmental responsibility (CER).

KLD data are used to generate subsamples of environmental “strengths” and “concerns”. Differences in EM are studied across subsamples, using discretionary accruals to proxy for EM. The samples consist of 2,171 US firms.

Firms with at least one environmental strength do not exhibit statistically different levels of EM, relative to environmentally neutral firms, while firms with at least one environmental concern do exhibit statistically greater EM (greater income‐increasing discretionary accruals), relative to other sample firms. Further, firms with multiple environmental concerns exhibit greater EM than firms with a single environmental concern. These findings do not support the political cost hypothesis per the CER/EM literature, but they do support the institutional hypothesis (in the case of environmental strengths) and myopia avoidance hypothesis (in the case of environmental concerns) per the broader corporate social responsibility (CSR)/EM literature.

The findings are limited to US firms; results may not be transferable to other countries. KLD data are binary, and thus may not capture the full array of CER.

The findings may aid interested parties in detecting EM.

The paper provides a new testing environment for theoretical frameworks established in the CER/EM and CSR/EM literatures. Additionally, the findings differ across subsamples, suggesting that the relationship between CER and EM is asymmetric.

Prior research suggests that firms manipulate earnings through accruals to achieve certain reporting objectives. Recently, especially following the Sarbanes‐Oxley (SarbOx) Act, researchers have turned their attention to real account manipulation as an alternative. However, there is no evidence on whether the likelihood of being detected by outsiders is different for firms using these alternative manipulation methods. The purpose of this paper is to examine this research question in the context of seasoned equity offerings (SEOs).

First, the authors compare SEOs to a matched sample of non‐SEOs to document income‐increasing manipulation. Next, they identify SEOs that prompt lawsuits and compare sued and non‐sued firms to determine whether using a particular method of manipulation is more likely to be detected and associated with litigation.

The authors find evidence of income‐increasing accrual and real manipulation for SEOs in the year prior to the offering in the pre‐SarbOx period, and find some evidence of a shift to real account manipulation post‐SarbOx. The authors examine the subsequent litigation pattern of these SEOs, and find that firms that are subsequently sued have a higher prevalence of income‐increasing discretionary accruals when the lawsuit allegations involve accounting issues. Following SarbOx, investors are paying less attention to accrual manipulation through accounts receivable and there is more scrutiny of real account manipulation.

The implication in this paper is that firms that engage in income‐increasing earnings management are more likely to be sued when they engage in accrual manipulation while other forms of manipulation may be less understood. This finding is important to investors and regulators.

The purpose of this paper is to investigate the operating and stock performance of subsidiaries prior to a parent–subsidiary merger and examine whether minority shareholders benefit from such a merger.

This paper employs a refined performance-adjusted discretionary accrual model as a measure for earnings management prior to parent–subsidiary mergers.

This paper finds evidence supporting the notion that subsidiaries’ operating performance is manipulated downward prior to parent–subsidiary mergers, but the incentive to expropriate minority shareholders depends on a parent’s percentage ownership of its subsidiary prior to the merger.

The findings of this paper have practical implications for investors and especially for policy makers to regulate this type of mergers.

This study contributes to the thin literature on parent–subsidiary mergers by providing empirical evidence that parent companies can expropriate their minority shareholders’ wealth in these mergers. This finding is consistent with the minority expropriation hypothesis, which contradicts the findings in prior studies on this unique type of mergers.

The purpose of this paper is to examine whether managers deliberately use accruals to convey information regarding firm future profitability.

The paper uses contemporaneous earnings and dividend increase announcements in New Zealand as the research setting. This setting reduces the possibility of opportunistic income smoothing by managers and, hence, increases the validity of the inference on the accrual signaling hypothesis. The paper employs a refined accrual model that controls the performance effects in estimating the part of accruals subject to managerial discretion.

The paper finds evidence consistent with managers using both accruals and changes in dividends to communicate private information regarding firm future profitability to the market. In particular, dividend‐increasing firms are observed to report positive accruals that are correlated with the positive market reaction to dividend increase announcements and future profitability. These findings are robust to performance, growth, and post‐earnings announcement drift effects.

This paper provides evidence that managers use accruals in conjunction with a corporate event to convey their private information regarding firm profitability. The results of the study are expected to shed more light on signaling aspects of accruals and to some degree alleviate the negative perception of managerial discretions over accruals vastly documented in the earnings management literature. This will hopefully add supporting evidence to the signaling hypothesis of accruals, which has so far received limited attention in the literature.