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A seemingly certain commonality in the extant literature is that firms that engage in the practice of managing earnings do so to massage their performance. The purpose of this paper is to examine the pecuniary effect of the prior cost of capital and a firm’s location on the propensity for firms to manage earnings.

This study uses longitudinal data for US firms from COMPUSTAT and Center for Research in Security Prices from 1980 to 2010 for an average of 1,627 firms. The authors apply several regression methods – namely: least squares regressions, quantile, interaction-terms, seemingly unrelated and endogeneity test – and come to similar conclusions.

The authors find that managed earnings behavior varies depending on the prior cost of capital. Managers positively exacerbate earnings when the firms’ prior cost of debt is high. Managers inverse its exacerbation of earnings when the firms’ prior cost of equity is high. This effect remains the same in all regression techniques applied in this paper.

The authors contribute to the literature primarily in three areas. First, by considering the effect of a firm’s location jointly on a firm’s prior cost of capital, the authors show that a firm’s environment amplifies the managers’ discretionary actions. Second, by showing that the prior cost of capital which a firm pursues can inundate the managers to pursue and exacerbate earnings. Finally, the evidence suggests that adjustment in previous years for debt obligated firms and that location affects managed earnings behavior.

The purpose of this paper is to document at the firm-specific level whether firms manage earnings up or down to barely miss or meet/beat three common earnings threshold targets, namely, analysts’ forecasts (AFs), last year’s earnings and zero earnings, and whether the market rewards or punishes up versus down earnings management.

The authors assign each firm to its most likely earnings target using an algorithm that reflects management’s economic incentives to manage earnings. The authors place reported (managed) earnings in standard width intervals surrounding the earnings target. Jacob and Jorgensen’s (2007) proxy for unmanaged earnings is also placed into the intervals. Thus, a firm with unmanaged earnings in the interval just below the target and reported earnings in the interval just above the target would be deemed to have managed earnings up. The authors also document whether the market rewarded or punished the earnings management strategy with three-day cumulative abnormal returns.

The authors find that most firms which barely meet/beat their target did so by managing earnings up. The market rewarded this earnings management strategy. The market did not, however, reward firms that managed earnings down (i.e. created a cookie jar of reserves) to barely meet/beat their target. Thus, the meet/beat premium does not apply to all firms. The authors’ explanation is that most earnings targets are set by AFs; that these are usually the highest of the three targets; and that these are, therefore, considered to be “good” firms by the market because they have the ability to find that extra penny to meet/beat the target. Firms that were assigned to the last year’s earnings and/or zero earnings thresholds are not as “good” because they usually do not target the highest threshold and must manage earnings down, as they are more likely to have to reverse income-increasing accruals booked during interim quarters.

The primary limitation in this study is the algorithm used to assign firms to their threshold target. It is ad hoc in nature, but relies on reasonable assumptions about the management’s incentives to manage earnings.

This study has practical implications because investors and regulators can adopt this methodology to identify potential candidates for earnings management that would allow further insight into accounting and reporting practices. This methodology may also be useful to the auditor who wants to understand the tendencies of a new client. It may also be a useful tool for framing auditing hypotheses in a way that would be appropriate for clients who manage earnings.

This paper documents for the first time at the firm-specific level the market reaction to upward versus downward earnings management designed to barely meet/beat the earnings threshold. It also documents the frequency with which firms target the three earnings thresholds and the frequency with which firms miss or meet/beat their threshold.

Discretionary accruals are earnings quality proxies that illustrate that the greater the value of discretionary accruals, the greater the practice of earnings management and vice versa. High-quality financial reports (especially earnings quality) are expected to help investors and potential investors to make decisions. This study analyses the factors that affect earnings quality, such as pre-managed earnings, liquidity and efficiency. Furthermore, the authors identify the moderating effect of the governance mechanisms proxied by the proportion of independent commissioners in conventional commercial banks listed on the Indonesia Stock Exchange.

This study uses 226 banking data in the pre-corona crisis period 2013 until 2019. The data were analyzed using EViews 10 for hypothesis and MS Excel for a differential test.

The results show that pre-managed earnings, liquidity and efficiency affect earnings quality. The governance mechanisms can moderate liquidity and efficiency on earnings quality, while pre-managed earnings cannot be moderated. The different bank categories (BUKU) of earnings management mechanisms are shown for each BUKU (BUKU 1, 3 and 4 perform earnings management by increasing earnings, BUKU 2 lowering earnings). Another thing is information on the earnings quality between BUKU 2 with BUKU 3 and BUKU 4 because of differences in capital and bank operating coverage regulations.

Further research expects to analyze the factors affecting banking earnings quality concerning applying IFRS 9 (PSAK 71) in Indonesia. Future researchers expect to apply mixed methods to verify the financial statement data and provide comprehensive discussion and genuine insight from their study. Future research requires more samples from companies or an international scale (cross country) to obtain maximum results and be generally accepted.

This study implies that managers should have more control over pre-managed earnings and bank liquidity as manager's incentive to do earnings smoothing. Managers should also pay attention to cost-efficiency and effective implementation of governance mechanisms to maximize earnings quality. This study also implies that policymakers can encourage commercial banks to apply more prudential principles in terms of a reserve for failed loans to minimize earnings management in banking.

The significance of this study revealed in the discussion of the difference test between bank core capital categories (BUKU) and its relation to earnings quality.

Prior research demonstrates that share prices reflect a risk premium that is associated with earnings variability. This suggests that managers can reduce the cost of capital and increase share prices by reducing earnings variability. In this study, we investigate bank managers' use of discretion in estimating loan loss provisions (LLP) to reduce earnings variability. We find that banks with relatively high pre‐managed earnings have positive discretionary LLP and banks with relatively low pre‐managed earnings have negative discretionary LLP, results that are consistent with the hypothesis of earnings management to reduce earnings variability. In addition, we find that bank managers' decisions to reduce earnings variability are related to the need for external financing and to gains and losses on the sale of securities which serve as substitutes for accomplishing their objective of earnings variability reduction.

This study aims to verify the circumstances under which managing the allowance for uncollectible accounts is used as a tool of earnings management.

The authors investigate whether bad debt expense, which is an income statement counterpart of allowance for uncollectible accounts, is adjusted downward when pre-managed earnings is slightly above zero earnings, prior year’s earnings or analysts’ forecasts.

The findings of this study show that firms manage bad debt expense downward to avoid losses, sustain the prior year’s earnings and meet or beat analysts’ forecasts. The authors also find that the understatement of bad debt expense to meet earnings benchmarks is pronounced for firms with high tax costs.

Standard setters and auditors can gain a better understanding in detail of the practices and methods of managing earnings via the allowance for uncollectible accounts.

This study is the first to examine earnings management via the allowance for uncollectible accounts in non-financial Korean firms. In addition, the findings provide the evidence that firms prefer to use the allowance for uncollectible accounts as a strategic tool to meet benchmarks, especially when their tax costs are high.

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 investigate whether earnings management that surpasses a threshold is associated with market mispricing.

The paper examines the level of discretionary current accruals (DCA) as a proxy for earnings quality. Operationally the threshold of earnings management is defined as the mean DCA, and it is assumed that highly managed firms (both income‐decreasing and income‐increasing) produce low‐quality earnings information. It is postulated that such management may lead to mispricing errors by investors who make incorrect adjustments for lower earnings quality.

The evidence suggests that investors possess idiosyncratic perceptions toward earnings management. Investors of income‐decreasing firms tend to under‐adjust for analyst optimism, while investors of income‐increasing firms are inclined to over‐adjust for analyst optimism. In addition, investors of both types of highly managed firms appear to under‐adjust for earnings management. These investor characteristics result in a post‐earnings announcement upward drift of cumulative abnormal returns (CARs) for income‐decreasing firms and a downward drift for income‐increasing firms.

The findings strongly indicate that there is a significant mispricing at the earnings announcement date for the income‐decreasing (P1) and income‐increasing (P5) portfolios and the mispricing persists in the short run. Thus, it may be possible for investors to exploit the mispricing by holding a long position in P1 and a short position in P5.

Prior studies concentrate on extreme cases of earnings management that are subject to securities and exchange commission (SEC) enforcement. In contrast to these studies, this paper focuses on the market reaction to earnings management, which may or may not lead to SEC enforcement actions.

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.

Charting the earnings numbers reported by Korean firms produces a bell curve, but for a sharp discontinuity in the area surrounding zero. The purpose of this paper is to investigate if and how a large segment of Korean managers might manage accounting numbers to produce the observed result.

This study adopts an empirical research method using Korean listed firms as a sample. The primary focus of investigation is on major income statement variables that might produce the observed results in earnings from operations and net income.

Managers of Korean firms opportunistically use almost all income statement variables to influence earnings numbers. They manage revenues and selling, general & administrative expenses to report small positive earnings from operations, but manage non-operating gains (losses) to report small positive net income.

This paper does not answer several questions related to loss avoidance. First, the paper did not examine which actions, such as discretionary accruals, opportunistic business decisions, or bogus transactions, were employed to affect line items on the income statement. Second, the paper did not investigate what specific incentives trigger Korean managers to report small positive earnings. Korean firms have traditionally raised capital by borrowing funds from creditors and governmental agencies. Thus, they may be concerned that reporting losses would reduce their borrowing capacity. Finally, corporate governance, such as CEO tenure and option grants may influence the extent of earnings management to avoid losses, but most corporate governance data for Korean companies must be manually collected. Accordingly, these subjects are left for future studies as well.

This study contributes to accounting literature by reporting how managers of Korean firms artificially coordinate major income statement variables and report small positive earnings figures, noting the differences between earnings management investigating methodology and ones used in previous studies.

Using a sample of 9,898 firm-year observations from 1,821 unique Chinese listed firms over the period from 2004 to 2019, this study aims to investigate whether the market rewards meeting or beating analyst earnings expectations (MBE).

The authors use an event study methodology to capture market reactions to MBE.

The authors document a stock return premium for beating analyst forecasts by a wide margin. However, there is no stock return premium for firms that meet or just beat analyst forecasts, suggesting that the market is skeptical of earnings management by these firms. This market underreaction is more pronounced for firms with weak external monitoring. Further analysis shows that meeting or just beating analyst forecasts is indicative of superior future financial performance. The authors do not find firms using earnings management to meet or just beat analyst forecasts.

The authors provide evidence of market underreaction to meeting or just beating analyst forecasts, with the market's over-skepticism of earnings management being a plausible mechanism for this phenomenon.

The findings of this study are informative to researchers, market participants and regulators concerned about the impact of analysts and earnings management and interested in detecting and constraining managers' earnings management.

The authors provide new insights into how the market reacts to MBE by showing that the market appears to focus on using meeting or just beating analyst forecasts as an indicator of earnings management, while it does not detect managed MBE. Meeting or just beating analyst forecasts is commonly used as a proxy for earnings management in the literature. However, the findings suggest that it is a noisy proxy for earnings management.