Search results

Purpose: This paper aims to study the impact of adoption eXtensible Business Reporting Language (XBRL) on earnings management.

Design/methodology/approach: This study uses a sample of all firms listed on the Indonesian stock exchange, except for finance and real-estate sectors from 2012 to 2019, with a total of 2,560 firms–years with panel data analysis.

Findings: Four findings in this study are listed as follow. First, the surprising result is that accrual earnings management increase after the adoption of XBRL. Second, after the adoption of XBRL, there was an increase in real earnings management. Third, the results of the study prove that the use of Big 4 auditors will weaken the increase in real earnings management after the adoption of XBRL. Finally, this study shows that after the adoption of XBRL, it turns out that both accrual and real earnings management experienced an increase.

Originality/value: This study contributes to providing an evaluation note to IDX regulators that the goals they want to achieve have not been achieved. This study provides empirical evidence for the debate over whether the adoption of XBRL is beneficial.

In this study, the author examines the effect of managers’ perception of product market competition on accruals and real earnings management.

The author develops a new text-based measure of the emphasis managers place on product market competition by conducting a textual analysis of firms’ 10-K filings. Using this measure, the author conducts a battery of econometric analyses and robustness checks to investigate the impact of this measure of product market competition on measures of accruals and real earnings management.

This study finds robust evidence that when management perceives more competitive threats, they are more likely to engage in accruals-based earnings manipulation but are less likely to engage in real earnings management activity. The author argues that these findings are due to managers’ career concerns enticing them to manage earnings via accrual when competition is high, but that greater product market competition discourages real earning management activity as it can diminish firms’ competitiveness.

The findings of this paper have important policy and practical implications since it signals that managers’ perceptions of product market competition is able to affect accounting choices, information environments and economic outcomes in firms.

This study develops a new text-based measure of managers’ perception of product market competition with the aid of GPT-4. The author then using this measure provides firm-level evidence on how this relates to earnings management.

The performance of the first batch of listed companies since the restart of new initial public offerings (IPOs) in January 2014 and their accounting information face repeated and volatile questioning from different sides. This paper aims to take Guirenniao (China) Co. Ltd. (GRN for short), one of the first batch of listed companies in 2014 that suffered performance decline, as an example to analyze how it managed earnings before IPO.

This paper examines earnings management signs that exist in GRN through analysis of its financial statements compared to those of its industry peers. This paper then uses the modified Jones model to detect its accrual earnings management and build three models, which are abnormal levels of cash flows from operations, abnormal production costs and abnormal discretionary expenses, to detect real earnings management.

This paper finds that GRN managed earnings through accrual and real activities in 2012 and 2013. Finally, this paper provides evidence on the specific methods of earnings management, which are easing credit policy to recognize revenue in advance, abnormal expansion, decreasing costs and connected transactions.

This paper examines earnings management signs exist in GRN through analysis of its financial statements comparing to those of its industry peers. This paper then uses the modified Jones Model to detect its accrual earnings management and build three models which are abnormal levels of cash flows from operations, abnormal production costs and abnormal discretionary expenses to detect real earnings management.

This study aims to investigate whether firms engage in earnings management behavior that attempts to manipulate Credit Rating Agency (CRA) perceptions during the Watchlist process and, if so, whether earnings management behavior appears to influence CRAs’ decisions.

To measure earnings management activities, this paper computes accrual-based and real earnings management measures in the year or in the quarter immediately before the Watchlist resolutions for all negative and positive Watchlist firms. To examine the association between the levels of earnings management and Watchlist resolutions, a logit model is applied to the data obtained from a sample of Watchlist firms.

Some evidence suggests that managers in Watchlist firms manage earnings in attempts to gain favorable Watchlist treatment. The findings are consistent with the Graham et al.’s (2005) survey evidence, which shows that one of the primary reasons for earnings management is to gain (or preserve) a desirable rating. In addition, CRAs appear to be misled by these attempts during the negative Watchlist process period.

The findings support SEC’s (2011, 2013a, 2013b) rules to reduce its reliance on credit ratings and the recent regulation reforms concerning the competition in the rating industry [the Credit Rating Agency Reform Act (2006)], and concerning conflicts of interest of CRAs among others [Dodd–Frank Wall Street Reform and Consumer Protection Act (2010)].

While many studies examine whether managers use discretionary accruals as a tool to manage earnings to obtain favorable ratings, those studies do not consider manipulation of real operating activities to manage earnings and CRA perceptions.

The purpose of this paper is to examine earnings management around tax rate reduction in the wake of the 2007 corporate tax reform in China.

This paper is an empirical work using a sample of listed Chinese real estate firms.

This study finds that firms managed earnings, including accrual-based earnings management and real earnings management, to decrease income in the fourth quarter of 2007, and to increase income in the first quarter of 2008. It suggests that the real estate firms were shifting income from the fourth quarter of 2007, when the statutory tax rate was 33 per cent, to the first quarter of 2008, when the statutory tax rate was 25 per cent, and therefore saved on tax payments. It also finds that corporate ownership structures, including ownership concentration and state ownership, affect earnings management. In the fourth quarter, state ownership is negatively associated with accrual-based earnings management, while ownership concentration is positively related to both accrual and real earnings management. In the first quarter, state ownership is negatively related to real earnings management.

Tax authority and policy makers might be interested in evidence on earnings management around tax rate reduction. Changes in tax rates increase the incentives to shift income, which may warrant a closer scrutiny by both outside auditors and tax auditors.

This paper is the first study that relates to both accrual-based earnings management and real earnings management to corporate tax rate changes by showing that firms manipulate income upward in the low-tax-rate periods and downward in the high-tax-rate periods.

Unlike firms listed in the USA, many large firms in Canada belong to business groups organized as pyramids. A pyramidal structure refers to a business group that consists of a set of enterprises or other entities and displays a top-down chain of control. The purpose of this paper is to investigate the relationship between pyramid ownership and earnings management.

The paper is an empirical study using a sample of 165 Canadian listed firms from 2010 to 2015. The impact of pyramid ownership on both accrual-based and real earnings management is examined.

The findings show that pyramid-affiliated firms engage in less accrual-based and real earnings management than non-pyramid-affiliated firms. The results further show that the divergence between control rights and cash flow rights of the controlling shareholders in the pyramid-affiliated firms is positively related to real earnings management. Moreover, the results highlight that intra-group transactions (other than internal financing) among pyramid-affiliated firms lead to higher level of both accrual-based and real earnings management, but internal financing is negatively associated with real earnings management. Overall, this study provides the evidence which indicates that pyramid ownership structure and earnings management are related to each other.

The paper contributes to the earnings management literature by studying the impact of pyramid ownership structure on earnings management, especially real earnings management.

This study aims to investigate earnings management practice of classification shifting of revenues in Chinese-listed firms.

The study employs a dataset of 2,920 A-listed firms from Chinese stock exchanges of Shanghai and Shenzhen for the period of 2003–2019. We apply both univariate and panel regression analysis by using fixed effect estimation with robust standard errors.

Our findings reveal that firms misclassify revenues by taking advantage of the flexibility provided by applicable financial reporting standards. The empirical evidence obtained through regression analysis suggest that managers reclassify non-operating revenues as operating revenue to alter the economic reality while seeking the advantage of financial reports users’ vulnerability for valuing the upper half of income statement items more as compared to lower part. The results further indicate that international financial reporting standards adoption inhibits the earnings management practices using classification shifting of revenues. It is also concluded that firms, which are suffering losses or having low growth, are more persistently involved in misclassification of revenues.

The study is unique from the point of view that it investigates earnings management from the prospective of revenue’s classification in an emerging market characterized by various market imperfections such as lower investor protection and higher information asymmetry.

This paper aims at studying earnings management phenomenon in its wider social and economic context to get better understanding for the following points: whether there is “one-size-fits-all” earning management approach which can be widespread applied among nations and whether the Egyptian context affects managers’ trade-off between three different earnings management approaches: accounting, operational and investment.

The paper adopts interpretive approach and analyses data from official documents and 34 interviews with company executives; financial analysts; external auditors; and Stock Exchange regulators to inform our understanding of the influence of the Egyptian context on the trade-off between earnings management approaches.

The results show that there is no application for “one-size-fits-all” earning management approach; unlike the developed cultures, where R&D expenses and overproduction are extensively used for boosting profits, in Egyptian context they are not valid tools. The findings indicate that the Egyptian political and economic context remarkably affect managers trade-off earnings management approaches, leading executives to prefer operational manipulation compared with others.

This paper extends but adds to the literature by shedding light on the different implications of earning management theories based on the variation in the political, economic and operational contexts of firms; identifying that operational cash flows matter more to managers than accounting profits; focusing on the fact that managers differentiate and compare between three various earning management approaches: accounting techniques, investment activities and operational activities; and showing that changes in political and economic Egyptian context makes operational manipulation favorable to be adopted compared with others. It also overcomes the criticism of New Institutional Sociology Theory.

The purpose of this study is twofold: (1) to examine the incremental contribution of product market fluidity (P_THREAT), another measure of competition from that of the Herfindahl index (H_COMP) and (2) to examine how a research and development (R&D) real activities earnings management strategy to meet an earnings target is influenced by competition.

Using a linear probability model, we test whether P_THREAT is incremental to the H_COMP competition measure and whether it influences the likelihood of firms using abnormally low R&D real activities earnings management to meet an earnings target.

We find that P_THREAT is incrementally informative to the commonly used Herfindahl measure of competition in predicting abnormally low R&D real activities earnings management activities. This finding is consistent with the notion of examining P_THREAT because the Herfindahl index alone may be incomplete, depending on the product makeup of a company. The negative coefficient suggests that reducing discretionary spending on R&D in the short run could have a detrimental effect on long-term profits because bypassed R&D opportunities would put firms at a disadvantage with their competitors' R&D efforts. In contrast, we find that firms are more likely to use R&D activities earnings management as a mechanism to meet an earnings target when P_THREAT is high. This suggests that when high competitive pressure exists, firms are more likely to use abnormally low R&D as a mechanism to meet an earnings target.

We specifically focus on R&D activities earnings management because our primary competition measure, P_THREAT, captures changes in rival firms' products relative to the firm. Because R&D is primarily what drives product change, R&D is the type of real activities earnings management that is most relevant to our competition measure. Hence, this study contributes to the literature by examining how competition influences the likelihood of firms possibly engaging in R&D activities earnings management and meeting earnings targets in the presence of P_THREAT competition.

This paper provides evidence on the impact of regulatory environment on financial reporting quality of transitional economies. This study compares the financial reporting quality of Hong Kong firms which are cross-listed in mainland China with those of Hong Kong firms cross-listed in China using specific earnings management metrics (earnings smoothing, timely loss recognition, value relevance and managing towards earnings targets) under pre- and post-IFRS regimes.

The financial reporting quality of Chinese A-share companies and Hong Kong listed companies are examined using earnings management measures. Using 2007 as base year, the study used a cumulative of −5 and +5 years of convergence experience which provide a total of 3,000 firm-year observations. In addition to regression analyses, we used the difference-in-difference analysis to check for the impact of regulatory environments on earnings management.

Through the lens of contingency theory, our results indicate that the adoption of the new substantially IFRS-convergent accounting standards in China results in better financial reporting quality evidenced by less earning management. The empirical results further shows that accounting data are more value relevant for Hong Kong listed firms, and that firms listed in China are more likely to engage in accrual-based earnings management than in real earnings management activities. We established that different earnings management practices that are seemingly tolerable in one country may not be tolerable in another due to level of differences in the regulatory environments.

The findings show that Hong Kong listed companies’ exhibit higher level of financial reporting quality than Chinese listed companies, which implies that the financial reporting quality under IFRS can be significantly different in regions with different institutional, economic and regulatory environments. The results imply that contingent factors such as country’s institutional structures, its extent of regulation and the strength of its investor protection environments impact on financial reporting quality particularly in transitional and emerging economies. As such, these factors need to be given appropriate considerations by financial reporting regulators and policy-makers interested in controlling earnings management practices among their corporations.

This study is a high impact study considering that China plays a significant role in today’s globalised economy. This study is unique as it the first, that we are aware of, to compare real earnings activities against accrual-based earnings management in pre- and post-IFRS adoption periods within the Chinese and Hong Kong financial reporting environments, distinguishing between cross-listed and non-cross-listed firms.