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This paper aims to examine the association between the types of mutual funds, i.e. active versus passive, and the level of earnings manipulation in companies that comprise their stock portfolios.

The authors use Cremers and Petajisto’s (2009) classification of mutual funds by active share and tracking error volatility to differentiate between active and passive mutual funds. To assess the extent of earnings quality at portfolio companies, the authors measure accruals earnings management and real earnings management.

The authors find that the portfolio firms held by active fund managers exhibit lower levels of earnings manipulation. The inverse relationship between earnings management and fund holdings is more pronounced at higher levels of active share selection among concentrated active fund managers.

The degree to which earnings management influences mutual funds’ investment behavior has significant implications for the stability of the US stock market. Based on the findings that earnings management at portfolio companies serves as a potential instrument to guide funds’ investment decisions, future research would examine how these investment preferences exert price pressure (if any) on the stock of the portfolio companies. It would also help to ascertain whether the investment preferences of fund managers with respect to earnings management help to render the stock market more or less efficient.

This paper contributes to the understanding of how actively managed funds perform stock selection. Earnings manipulation leads to negative earnings quality that would inhibit stock performance over time. Active fund managers, who dynamically manage their exposures to systematic and stock-specific risks (in their attempt to outperform their benchmark index), target firms that manage earnings less to form part of their investment portfolios.

This study aims to examine whether the internal control system quality in the French context improve the information quality having been reflected by the level of real earnings management (REM) measured by inventory overproduction, discretionary expenses reduction and sales manipulation.

The research uses a multiple regression analysis to examine the association between internal control and REM. The years 2010-2015 are used as analysis period by focusing on the French context. Three panel data are applied to the companies belonging to the Cotation Assistée en Continu (CAC) 40 index for the entire study period.

The results show that high internal control index has a negative impact on the REM and that better internal control indeed makes financial reporting more credible to investors. Further, the results demonstrate that control environment, risk assessment, control activities and monitor are the components that mainly affect REM.

The results contribute to the literature dealing with the relationship between internal control quality and REM by shedding light on the importance of internal control quality in improving information quality in the French context. Moreover, this study is using a quantitative measure of the internal control quality while much of the prior literature uses material weaknesses to estimate the effectiveness of internal control system.

The purpose of this paper is to examine the influence of CEO discretion on the real earnings management and to explore whether the discretion of the CEO to ensure accurate and reliable financial reports is influenced by the political connection of board members.

Using the generalized method of movement to control the potential endogeneity on the sample of listed companies in Nigeria, the study conducted several checks using Driscoll–Kraay panel data regression with standard error to robust the main findings.

The paper provides evidence that CEO Discretion reduces the tendency of real earnings management and improve the reporting quality. However, the CEO’s discretion to provide reliable financial reports and to reduce the likely earnings manipulation is overturn by the presence of politically connected directors.

Existing studies on CEO attributes and earnings management in Nigeria fail to explain why CEOs were involved in corporate financial scandals. This paper suggests that the presence of politically connected directors is what override and upturn the CEO discretion to dwell into real earnings manipulations. Prior studies measured political connection using a dummy variable (Chaney et al., 2011; Osazuwa et al., 2016; Tee, 2018), this paper measured political connection using the proportion of politically connected directors. This is on the idea that the presence of more politically connected directors may give them the power to override the CEOs decision.

This study aims to examine how the prestige of audit committee (AC) chairpersons influences earnings management.

The sample contains 1,973 firm-year observations of French listed firms for the period 2007–2018. The authors examine the status of AC chairs and CEOs by focusing on the French business elite system. This study tests the association between AC chairs’ (relative) status and the level of earnings management using measures of accrual earnings management and real earnings management (REM).

The results of this study do not show that high-status AC chairs constrain accruals manipulation. However, the results provide evidence that they play a key role in constraining REM. High-status AC chairs are more likely to enhance the monitoring of this type of manipulation, given their thorough knowledge and understanding of the firm’s business environment and practices. This study also finds evidence that AC chairs with a status higher than CEOs are associated with lower levels of REM. The results suggest that prestigious AC chairs influence lower status CEOs’ strategic decisions.

This study demonstrates that high-status AC chairs play an important role in detecting and constraining deviations from normal business practices. The results have substantial implications for boards, which will benefit from an understanding of how the appointment of high-status chairs affects financial reporting quality.

This paper examines the relationship between poison pills, real earnings management and initial public offering (IPO) failure.

The authors sampled 2,997 IPO firms that went public during 1993-2015.

The authors find that IPO firms manipulate earnings upward using real earnings management. The authors also find that IPO firms exhibiting a higher level of real earnings management have a higher probability of IPO failure. In addition, the authors find that weak shareholders' governance is positively associated with IPO failure.

These results suggest that poor governance structures in failed firms open the door to manipulating real activities and increasing operational risk.

The study findings are of most significant interest to potential investors and other stakeholders affiliated with a firm going public, an auditor, an underwriter, the lawyers who consult with the firm and employees or executives who might consider joining that firm.

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.

This paper aims to investigate whether single-name options trading prior to earnings announcements is more informative when there exist real activity manipulations.

Using 5,419 earnings announcements during 2004–2018 made by 208 public US companies with relatively high options volumes ranked by the CBOE, the authors uncover two regularities using predictive regressions for stock return.

First, the total options volume up to twenty days pre-announcement is significantly higher than that in other periods only for earnings management firms; moreover, after detailing options characteristics, the authors find these intensive pre-announcement trading to be concentrated in transactions of in-the-money call and long-term maturity put options. Second, an increase in the single-name call minus put options volume can positively predict the underlying stock’s next-day excess return much better in real earnings management firms, with a larger magnitude of effect in periods right before regular earnings announcement dates.

This paper makes a marginal and novel contribution by showing that real earnings management can serve as a proxy for the potential profit from informed trading in options as the return predictability of options volume becomes stronger for firms that have the manipulation motive and indeed perform manipulative actions.

This study aims to explore how earnings management techniques are affected by corporate financial debt risk (FDR), internal control (IC) effectiveness and CEO education.

The study uses a sample from listed firms in China from 2010 to 2017, comprising different industries, including agriculture, forestry, livestock farming and fishing; mining; manufacturing; electric power, gas and water production and supply; construction; transport and storage; information technology; the real estate industry; social services; and communication and cultural. The regression analysis is used to test the hypotheses. The two-stage least squares technique is used to check for endogeneity issues.

The study finds that firms are less likely to manage real earnings when they have more robust IC and FDR. Likewise, companies with weak ICs are more likely to manipulate real earnings. Besides, the study finds an influence of CEO education on the relationship between IC, FDR and real earnings management (REM). These results can be applied to the sectors in the sample covered by the research, and the authors do not overlook the energy industry sector for the importance of its role in the economy.

There are some limitations for the researcher when performing any research, and this study is no exception. Researchers are urged to take these circumstances into consideration when generalizing or comparing the results because the methods used to calculate the measurement variables in each study may differ somewhat from those used in other research. In addition, expanding the current research design to incorporate additional nations may be an area of interest for future research and could aid in evaluating the effects of nation-specific elements (such as inflation, culture, legal systems and political considerations) on the usefulness of IC and decreasing FDR. Second, the current study focuses on the impact of IC and FDR on REM; this paper does not dissect the “black box” of IC and consider how each element affects earnings management. Future research may need to focus specifically on how effective IC would affect earnings management and precisely what IC mechanisms would discourage the management of earnings.

Helping companies listed in China to make decisions and improve investors’ vision of the results of real companies’ businesses, as well as helping management to avoid falling into debt risk and the consequent effects and manipulation of earnings.

By highlighting the significance of IC and debt risk in enhancing information quality in China, the results contribute to the body of work examining the relationship between IC, FDR and REM. In addition, this study uses a CEO’s education to moderate this link.

This study aims to examine the non-linear relationship between corporate diversification and real and accrual earnings management, using a sample of 5,659 US firm-year observations for 1,221 firms covering the period from 2001 to 2012.

The authors use various techniques and regressions to test the hypotheses. Following prior research, several proxies have been used to measure diversification, accrual earnings management and real earnings management.

The study produces several important findings. First, the study provides evidence that diversified firms engage in real and accrual earnings management to manage their reported earnings upward. These results are consistent with recent research (Farooqi et al., 2014; Jirapon et al., 2008) that finds that diversified firms engage in earnings manipulation. Second, and most importantly, the study contributes to the literature by providing the first evidence on a non-linear relationship between corporate diversification and earnings management. Specifically, the study provides evidence that diversified firms engage in accrual (real) earnings management, but this engagement is associated with level of diversification in a non-linear U-shaped (inverted U-shaped) relationship.

Like all other studies, the current study has some limitations. The study was conducted only on the largest firms in the USA that have market capitalization of more than US$10m; hence, the findings may not be generalizable to small publicly traded firms. Further, the findings may not be generalizable to other markets, given the unique characteristics of US markets such as the presence of very sophisticated investors.

This study provides some important implications for US regulators to revise their regulations to prevent diversified firms from using earnings management to manipulate reported earnings.

This study is the first in the USA to examine the non-linear relationship between corporate diversification and earnings management. The study focuses on one of the most active, most attractive and largest capital markets throughout the world, that of the USA. Also, this study is one of the few studies that examine whether diversified firms use real activities manipulation to manage their reported earnings.

The purpose of this paper is to investigate the relationships among corporate social responsibility (CSR), analyst forecast accuracy and firms’ earnings management behavior using US-based firms.

The authors use the Kinder, Lydenberg, Domini (KLD) database to construct CSR performance scores and divide all firms into ten groups from high to low as a proxy for CSR performance. The authors obtained an initial sample of 33,364 firm-year observations from 1991 to 2012. Filtering for records which exist in the KLD, Compustat, and Center for Research in Security Prices databases lefts a total of 16,807 firm-year observations and CSR evaluation reports for 5,896 firms.

The authors find that high CSR-score firms have lower rates of analyst forecast error than their low CSR-score counterparts, suggesting that CSR performance is a useful means of forecasting earnings. Furthermore, firms with better CSR performance have significantly lower accrual-based earnings management behavior. However, the level of the manipulation behavior of real earnings management (REM) activities increased significantly in better CSR firms, suggesting that high CSR-score firms substituted REM methods for accrual-based methods. REM methods are consistent with the stipulations of the Sarbanes-Oxley Act and allow high CSR-score firms to better manipulate earnings behavior. These results hold after the authors control for various factors related to firm financial characteristics.

Overall, the findings have important implications for investors and regulators to more easily assess firms’ earnings manipulation behavior and earnings stability under CSR performance and financial information in financial markets.