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This paper aims to examine the extent to which real earnings management (REM) is used in Jordan to meet zero or previous year's earnings, and how this impacts the subsequent operating performance of Jordanian firms.

The study used a sample of 98 Jordanian listed firms over the 2010–2018 period. To test the research hypotheses, which are formulated in accordance with both, agency theory and signalling theory, multivariate regression is performed using a pooled OLS estimation. Additionally, a two-step dynamic generalised method of moment (GMM) model has been estimated to address any concerns regarding the potential occurrence of endogeneity issues.

The results show that Jordanian firms that meet zero or last year's earnings tend to exhibit evidence of real activities manipulations. More specifically, suspect firms show unusually low abnormal discretionary expenses and unusually high abnormal production costs. Further, consistent with the signalling earnings management argument, the authors find that abnormal real-based activities intended to meet zero earnings or previous year's earnings potentially improve the subsequent operating performance of Jordanian firms. This implies that REM is not totally opportunistic, but it can be used to enhance the subsequent operating performance of Jordanian firms. Our findings are robust to alternative proxies and endogeneity concerns.

The findings have several implications for policymakers, regulators, audit professionals and investors in their attempts to constrain REM practices to enhance financial reporting quality in Jordan. Managing earnings by reducing discretionary expenses appeared to be the most convenient way to manipulate earnings in Jordan. It provides flexibility in terms of time and the amount of spending. The empirical evidence, therefore, reiterates the crucial necessity to refocus the efforts of internal and external auditors on limiting this type of manipulation to reduce the occurrence of REM activities and enhance the subsequent operating performance of listed firms in Jordan. Drawing on Al-Haddad and Whittington (2019), the evidence also urges regulators and standards setters to develop a more effective enforcement mechanism for corporate governance provisions in Jordan to minimise the likelihood of REM incidence.

This study contributes to the body of the accounting literature by providing the first empirical evidence in the Middle East region overall on the use of REM to meet zero or previous year earnings by Jordanian firms. Moreover, the study is the first to empirically examine the relationship between REM and Jordanian firms' future operating performance.

The purpose of this paper is to investigate the association between unemployment insurance (UI) benefits and firms’ future performance as well as the association between UI benefits and volatility of firms’ future performance.

Quantitative analyses are used to perform empirical testing, and the variables in this study have been selected from previous literature. Empirical data consists of UI benefits data published from 2003 to 2012 on the US Department of Labor website, accounting data from Compustat, and stock return data from CRSP.

Unemployment benefits are positively associated with firms’ future earnings and cash flows. Also, unemployment benefits are negatively associated with volatility of firms’ future earnings and cash flows. Finally, the positive association between unemployment benefits and firms’ future performance is more pronounced for firms with larger changes in labor force, and the negative association between unemployment benefits and volatility of firms’ future performance is more pronounced for firms with higher labor force volatility and capital structure volatility.

To the extent that other correlated omitted variables exist, the readers are asked to interpret the findings in this paper with caution.

This study contributes to prior literature on labor economics, finance, and accounting. The findings may be of interest to academic researchers and policy makers.

The purpose of this paper is to link valuation of different accounting items to research and development (R&D) investment decisions and investigate how suboptimal R&D choices during initial public offering (IPO) are linked to future operating and market underperformance.

For firms with substantial growth opportunities, accounting net income is a poor measure of the firm’s performance (Smith and Watts, 1992). Therefore, other metrics such as R&D intensity are used by investors to evaluate firms’ performance. This leads to a coexistence of two strategies: if earnings are the main value driver, firms tend to underinvest in R&D; and if R&D expenditures are the main value driver, firms tend to overinvest in R&D.

The authors show that the R&D investment decision varies systematically with cross-sectional characteristics: firms that are at the growth stage, unprofitable or belong to science-driven industries are more likely to overinvest, while firms that are able to avoid losses by decreasing R&D expenditure are more likely to underinvest. Finally, they find that R&D overinvestment leads to future underperformance as evidenced by poor operating return on assets, lower product market share, higher frequency of delisting due to poor performance and negative abnormal stock returns.

While prior literature concentrates on R&D underinvestment as a tool of reporting higher net income, the authors demonstrate the existence of an alternative strategy used by many IPO firms – R&D overinvestment.

The purpose of this paper is to analyze the effect of managers’ incentive bonuses on both accrual and real earnings management.

First, the authors investigate the relationship between managers’ bonuses and both accrual earnings management (measured by a modified Jones model) and real earnings management (measured by Roychowdhury proxies). Next, the authors examine whether management has any preferences for earnings management methods to enhance its bonuses. Finally, the authors investigate the possible effects of earnings management on future operating performance. The sample consists of compositional data in the period from 2006 to 2012.

The authors find a negative relationship between real earnings management and managers’ bonuses and detect that managers prefer to use accrual earnings management to earn more bonuses. The results also show that real earnings management will reduce a firm’s performance in future periods, and on the other hand that increasing managers’ bonuses links to improvement of the firm’s future performance. The results suggest that managers are typically aware of the negative effects of real earnings management on the firm’s future performance and thus prefer to improve the firm’s performance in securing their bonuses when their ability to manage accruals is constrained.

The implications of this paper provide further evidence on how managers’ bonuses affect their discretion in using accrual and real earnings management. This finding is important to investors and regulators.

The main purpose of this study is to investigate the relationship between intangible investments (R&D, advertising, training, software acquisitions and quality) and the ability of firms to generate future OCF (hereafter cash‐flow from operations).

The authors developed dynamic panel models to estimate the relationship between intangible investments and three subsequent periods cash flows. These models are estimated using generalized method of moments (GMM), on a panel of 300 observations related to 50 Tunisian manufacturing firms and six years of data (2001‐2006).

The findings show a positive and significant effect of intangible investments on future operating cash flows. First, this result confirms the main hypothesis of resource based view (RBV). Second, it is found that investments in R&D, quality, and advertising have significant effects on future cash flows from operations. While the effect of R&D activities and quality persists until the third lagged period, the effect of advertising expenditures is rapid and temporary.

The investigation provides an empirical validation on the role of intangible investment in generating and sustaining competitive advantage. The significant effect of R&D and quality expenses indicates the role of these activities in adding value to the firm product, and hence in the creation of competitive advantage which allows the firm to manage the components of its operating cycle, especially cash received from customers, resulting in superior future cash flows from operations.

First, the use of cash‐flow basis, as an alternative approach to accrual basis, for intangibles valuation avoids the shortcomings of accrual‐based performance measures in forecasting future operating cash flows because of earnings management practices. Second, the majority of the research dealing with the valuation of intangibles has been conducted in the context of developed countries, therefore in terms of the relevance of intangible investments significantly less is known about emerging economies. The choice of Tunisia, in this regard, is a particularly important contribution to the research on emerging economies.

The present study aims to examine the relationship between real earnings management and earnings persistence and also to test how the group affiliation of the firms influences this relationship.

The study draws the sample of listed non-financial firms in the Indian market from the year 2011 to 2018 and applies panel least squares regression with industry and year fixed effects. Future performance of a firm is measured by one year leading value of return on assets. The interaction term of real earnings management and return on assets is used to measure the impact of real earnings management on earnings persistence. The firm-specific controlling variables are also included in the empirical model. The robustness of the results is tested by sub-dividing the sample into group affiliated and non-group affiliated firms.

The findings of the study reveal that opportunistic earnings management has a significant impact on earnings persistence when real earnings management is measured through abnormal increase in operating cash flows and abnormal reduction in discretionary expenditure. On the other hand, signalling earnings management has a significant impact on earnings persistence when real earnings management is measured through abnormal increase in the level of production. The results also reveal that REM has more negative implications on group affiliated firms compared to non-group affiliated firms supporting the theory of entrenchment effect.

This is the first study in the Indian context which tests the implications of real earnings management on earnings persistence by using three alternative measures of real earnings management. The study contributes to the existing literature on the implications of real earnings management in emerging markets like India.

Accelerated share repurchases (ASRs) represent an important recent innovation in repurchase methods. Although executives often mention signaling undervaluation as a motivation for ASRs, managing earnings per share (EPS) has been argued as a key alternative motivation in the financial press. This paper aims to investigate whether ASRs are driven by managerial opportunism (i.e. managing EPS) or managerial optimism (i.e. signaling undervaluation) and whether stock market participants see through these motives.

The sample consists of 293 ASRs conducted between 2004 and 2011. Firms suspected of using ASRs to manage EPS (EPS-suspect firms) were identified by examining actual reported EPS, as-if EPS (i.e. EPS that would have been reported in the absence of an ASR), and analysts’ consensus EPS forecasts. A logistic regression of EPS-suspect versus non-EPS-suspect ASR transactions was performed. Analysts’ reactions to ASR announcements and investors’ reactions to post-ASR earnings announcements were examined. Changes in post-ASR operating performance were also analyzed.

Twenty-nine per cent of ASR firms (EPS-suspect firms) would have missed the consensus EPS forecasts had they not implemented the repurchase. Managerial incentives – securing bonuses and maintaining reputation by avoiding EPS misses – appear to lie behind this opportunistic use of ASRs. Upward revision observed in analysts’ EPS forecasts upon the announcement of ASRs is short-lived, indirectly facilitating firms’ use of ASRs to meet or beat consensus forecasts. Investors, however, are not fooled by managers’ use of ASRs as an earnings management device. Unlike EPS-suspect firms, non-EPS-suspect firms exhibit positive abnormal operating performance during the post-ASR period, suggesting that these firms use ASRs as a signaling device rather than as an earnings management device.

ASRs can be used by managers to signal better future performance to investors. However, managers who intend to do so should carefully consider the timing of an ASR. Initiating an ASR when the company is facing the risk of missing analysts’ EPS forecasts may be interpreted as the ASR being motivated by EPS management concerns rather than signaling, diminishing the credibility of a positive signal intended to be conveyed through the ASR. Further, when considering payout policy and executive compensation decisions, corporate boards need to be cognizant of managers’ incentives for undertaking ASRs. The use of ASRs opportunistically to boost EPS is prevalent, and this action is followed by poor performance.

A number of novel results are documented using tests that are methodologically distinct from those used in related previous research. Notably, this is the first study to distinguish between EPS-suspect and non-EPS-suspect ASR firms and examine the determinants as well as consequences of using ASRs as an earnings management versus signaling device. One out of every four ASR firms are EPS-suspects. Analysts react to ASR announcements by only temporarily increasing their short-term EPS forecasts. Investors see through managers’ use of ASRs as an earnings management device. While ASRs are prone to managerial opportunism, a large number of firms use ASRs to communicate favorable information about their future operating performance to investors.

This study examines the relation between negative goodwill (NGW) and operating performance after mergers and acquisitions (M&A).

This is a comparative analysis of post-M&A operating performance for 228 transactions involving listed Japanese firms that generated negative or positive goodwill.

First, post-M&A operating performance is lower when the transaction generates NGW. Second, the negative relation between NGW and post-M&A performance is stronger when managers have incentives for earnings management and when target firms perform poorly before M&A. Third, changes in the accounting treatment of NGW alter the relative importance of earnings management incentives and target firms' poor pre-M&A performance.

Prior studies attribute the negative relation between NGW and post-M&A performance solely to acquiring firms' managers' earnings management incentives. The current study finds that the target firm's poor pre-M&A performance is also associated with the relation between NGW and post-M&A performance.

Many argue that the design of compensation contracts for public company chief executive officers (CEOs) is often not guided by a goal of value maximization. Yet, there is limited direct empirical evidence on the negative consequences of the proposed inefficient contracting between shareholders and CEOs. Using data on CEO bonus contracts of the S&P 500 firms, we investigate potential firm performance implications of the use of qualitative criteria such as leadership and mentoring in those contracts. We maintain that unlike quantitative criteria, qualitative criteria are difficult to define and measure on an objective basis, possibly resulting in an inefficient and biased incentive structure. Twenty-five percent of the sample observations have CEO bonus contracts that include a qualitative criterion for bonus payment determination. Our results show that employee productivity, asset productivity, capital expenditures, and future abnormal stock returns are lower for firms that use a qualitative criterion in CEO bonus contracts than those that do not. Further, contrary to the argument in prior literature that earnings management decreases with the use of subjective performance indicators in incentive contracts, we find that income-increasing accruals are actually higher when the CEO bonus contract includes a qualitative criterion. We recommend that compensation committees set concrete, measurable performance goals for CEOs, providing CEOs with better guidance and helping improve their corporate decision making.

The purpose of this paper is to examine whether outside CEO directors sympathize with the company CEO due to their similar positions and prestige, and make decisions in favor of the company CEO. Specifically, the authors investigate how outside CEO directors serving on the compensation committee influence CEO compensation.

The authors investigate how outside CEO directors on the compensation committee impact the level and pay‐for‐performance sensitivity of CEO compensation. In addition, the relation between excess CEO compensation (attributable to outside CEO directors) and future firm‐operating performance is examined.

It is found that outside CEO directors on the compensation committee are associated with higher CEO compensation. However, excess CEO compensation attributable to outside CEO directors leads to poor future firm‐operating performance. Outside CEO directors are associated with higher CEO pay‐for‐performance sensitivity when the company experiences positive stock returns, but do not impact pay‐for‐performance sensitivity when firm performance is poor. Finally, when the company CEO has more influence on the board, outside CEO directors are more likely to serve on the compensation committee.

The paper is among the first to show that having outside CEO directors on the compensation committee might create agency problems and is costly to shareholders. The findings of the authors' study are relevant to current efforts of regulators and private sectors to enhance oversight of executive compensation.