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Article
Publication date: 11 March 2019

Nargis Kaisar Boles Makhaiel

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…

Abstract

Purpose

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.

Design/methodology/approach

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.

Findings

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.

Originality/value

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.

Details

Journal of Financial Reporting and Accounting, vol. 17 no. 1
Type: Research Article
ISSN: 1985-2517

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Book part
Publication date: 4 March 2015

Matthias Nnadi, Kamil Omoteso and Yi Yu

This paper provides evidence on the impact of regulatory environment on financial reporting quality of transitional economies. This study compares the financial reporting…

Abstract

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.

Details

Neo-Transitional Economics
Type: Book
ISBN: 978-1-78441-681-2

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Article
Publication date: 16 March 2015

Mahdi Moradi, Mahdi Salehi and Mohammad Zamanirad

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

Abstract

Purpose

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

Design/methodology/approach

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.

Findings

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.

Originality/value

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.

Details

Management Decision, vol. 53 no. 2
Type: Research Article
ISSN: 0025-1747

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Article
Publication date: 26 September 2019

Muhammad Safdar Sial, Xuan Vinh Vo, Lara Al-Haddad and Thao Nguyen Trang

The purpose of this paper is to check the impact of female directors on the board and foreign institutional investors on earnings manipulation.

Abstract

Purpose

The purpose of this paper is to check the impact of female directors on the board and foreign institutional investors on earnings manipulation.

Design/methodology/approach

The data sample includes Chinese listed companies on the Shenzhen and Shanghai stock exchanges. The data are collected from China Stock Market and Accounting Research database covering the period from 2010 to 2017. The authors use a dynamic generalized method of moments in the study.

Findings

The findings show that the presence of female director on the board has a significant negative impact on both discretionary accruals and real earning management. However, the authors obtain different results for foreign institutional investor investors. This may be the result of myopia as the foreign institutional stockholders in Chinese companies are looking for quick profit encouraging management to manipulate earnings. the findings survive several robustness tests.

Originality/value

The authors expect the research results provide ample evidence about how female directors affects earnings manipulation, and also hope the research helps to understand how, in China, institutional ownership affects earnings manipulation.

Details

Asia-Pacific Journal of Business Administration, vol. 11 no. 3
Type: Research Article
ISSN: 1757-4323

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Article
Publication date: 27 July 2018

Lik Jing Ung, Rayenda Khresna Brahmana and Chin-Hong Puah

The purpose of this paper is to investigate whether real estate companies manipulate their earnings through the brokerage fee across ownership expropriation or not.

Abstract

Purpose

The purpose of this paper is to investigate whether real estate companies manipulate their earnings through the brokerage fee across ownership expropriation or not.

Design/methodology/approach

This study considers Kuala Lumpur Stock Exchange listed real estate firms to investigate how the brokerage fee in the real estate industry might affect the earnings management of firms across its ownership expropriation. Using annual report data, the authors investigate the associations over a panel for the period 2008−2012. Robust panel regression is used to divulge the probability values with reference by probit regression.

Findings

Overall, the results show that high brokerage fees would drive more events of earnings management and that, generally, the ownership concentration among Malaysian real estate firms significantly affects the earnings management of the firms.

Practical implications

This study shows that firm profitability and brokerage fees enhance the probability of firm’s earnings management. A low brokerage fee would reflect low revenue to the company. Therefore, management would opt to manipulate earnings in order to overstate earnings, which garners more interest from investors.

Originality/value

Real estate values in Malaysia have climbed steadily over the years due to a combination of reasons giving companies a higher brokerage fee. Earnings management has become a big issue for property investors. The study demonstrates the relationship between earnings management and brokerage fee across ownership expropriation which can be considered by shareholders in their own strategic planning and investors in their own investing.

Details

Property Management, vol. 36 no. 4
Type: Research Article
ISSN: 0263-7472

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Article
Publication date: 21 January 2021

Ahmed Yamen, Cemil Kuzey and Muhammet Sait Dinc

This paper examines the link between culture, institutional quality and real earnings management and accrual earnings management by combing the study by Hofstede (2001…

Abstract

Purpose

This paper examines the link between culture, institutional quality and real earnings management and accrual earnings management by combing the study by Hofstede (2001) and Enomoto et al. (2015). The paper tries to test the effect of culture on institutional quality and both real earnings management (REM) and accrual earnings management (AEM).

Design/methodology/approach

The sample of the research paper includes 38 countries. Hofstede cultural dimensions are used to measure cultural values. Public governance indicators published by the World Bank are used as a proxy for measuring the institutional quality. Earning management scores constructed by Enomoto et al. (2015, p. 191) are used for measuring real earnings management (REM) and accrual earnings management (AEM). Partial Least Square (PLS) based Structural Equation Modelling (SEM) is used to test the relationship between culture, institutional quality and earnings management.

Findings

The results support the relationship between culture and institutional quality. Also, the results reveal a significant relationship between culture and accrual earnings management, but an insignificant relationship between culture and real earnings management. In addition to that, another important finding is that institutional quality has a significant impact on real earnings management, but has no significant effect on accrual earnings management.

Practical implications

The results suggest that standard setters need to consider the quality of institutions to improve the quality of financial reports. Also, it highlights the role of both formal and informal cultures in shaping financial reports.

Originality/value

For the best of our knowledge, this the first time to test the link between culture and institutional quality and comparing the impact on both real earnings management and accrual earnings management.

Details

EuroMed Journal of Business, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1450-2194

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Article
Publication date: 14 May 2018

Mohammad Alhadab and Thang Nguyen

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…

Abstract

Purpose

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.

Design/methodology/approach

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.

Findings

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.

Research limitations/implications

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.

Practical implications

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.

Originality/value

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.

Details

Review of Accounting and Finance, vol. 17 no. 2
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 5 August 2019

Muhammad Safdar Sial, Zheng Chunmei and Nguyen Vinh Khuong

This study aims to explore the possibility of a two-way relationship between corporate social responsibility (CSR) and earnings management (accruals and real EM) with the…

Abstract

Purpose

This study aims to explore the possibility of a two-way relationship between corporate social responsibility (CSR) and earnings management (accruals and real EM) with the moderating role of female and independent directors.

Design/methodology/approach

The authors use STATA to test the generalized method of moments on a sample of Chinese listed firms data over the period 2009-2015. The unbalanced sample obtained 3,481 observations from China stock market and accounting research database and CSR rating provided by Rankins.

Findings

The results indicate a significant negative relationship between two-way CSR and accrual-based EM. Moreover, female and independent directors moderate the two-way relationship between CSR and EM.

Research limitations/implications

The present study does not include all financial, insurance and investment firms to impact on CSR and EM. Further research might consist of family ownership to enhance the evidence for an emerging market.

Originality/value

This study primarily contributes to the literature on CSR, female and independent directors, and EM by providing evidence for the moderating role of female and independent directors on the two-way association between CSR and EM.

Details

International Journal of Accounting & Information Management, vol. 27 no. 3
Type: Research Article
ISSN: 1834-7649

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Article
Publication date: 30 April 2019

Peterson K. Ozili and Erick Outa

The purpose of this paper is to investigate whether banks use commission and fee (CF) income to manage reported earnings as an income-increasing or income smoothing strategy.

Abstract

Purpose

The purpose of this paper is to investigate whether banks use commission and fee (CF) income to manage reported earnings as an income-increasing or income smoothing strategy.

Design/methodology/approach

The authors employ the regression methodology to detect real earnings management.

Findings

The authors find that banks use CF income for income smoothing purposes and this behaviour persists during recessionary periods and in environments with stronger investor protection. The implication of the findings is that bank non-interest income which achieves diversification gains to banks is also used to manipulate reported earnings.

Research limitations/implications

The findings show that real earnings management is prevalent among banks in Africa. Further research into earnings management should examine real earnings management among non-financial firms in developing regions.

Practical implications

From an accounting standard setting perspective, the evidence suggests the need for national/international standard setters to adopt strict revenue recognition rules that ensure that banks or firms report the actual fees they make, and to discourage banks from delaying (or deferring) the collection of fee income to manage or smooth reported earnings opportunistically.

Originality/value

This study contributes to the positive accounting theory (PAT) literature which examines the accounting and non-accounting decisions that influence managers’ choice of accounting methods in financial reporting. Extending the PAT, the authors show that certain conditions can incentivize managers to engage in earning management such as during recessions and weak institutional quality or weak investor protection.

Details

Journal of Applied Accounting Research, vol. 20 no. 2
Type: Research Article
ISSN: 0967-5426

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Article
Publication date: 6 November 2017

Talie Kassamany, Salma Ibrahim and Stuart Archbold

This study aims to investigate the occurrence of pre-merger earnings management for a sample of 197 stock- and cash-financed UK acquirers between 1990 and 2009. It also…

Abstract

Purpose

This study aims to investigate the occurrence of pre-merger earnings management for a sample of 197 stock- and cash-financed UK acquirers between 1990 and 2009. It also examines the earnings management behaviour around the change in the Corporate Governance Code in 2003 based on the Higgs recommendations.

Design/methodology/approach

Mean and median accrual- and real-based manipulation are examined in the period before the announcement of a merger and acquisition. These are compared across stock and cash acquirers as well as before and after the implementation of the Higgs recommendations. Logistic regressions are also run to examine accrual- and real-based manipulation across stock and cash acquirers after controlling for variables that may affect the acquisition type.

Findings

The study found some evidence of upward pre-merger accrual-based earnings management by stock-financed acquirers, which is in line with the findings of Botsari and Meeks (2008). Furthermore, no significant changes were found in the post-Higgs period, which indicates that the recommendations put forth by Higgs may not have been successful in mitigating earnings management. The evidence also shows that cash bidders engage in pre-merger real earnings manipulation through lower discretionary expenses, possibly to enhance cash availability for the bid.

Practical implications

The findings in this study confirm earnings management exists around mergers and acquisitions and provide some evidence that the recommendations set out in the Higgs Report do not appear to have mitigated earnings management activities. This is of interest to regulators as well as investors and academicians.

Originality/value

This provides the first analysis in the UK examining the use of real-based earnings management activities by UK acquirers. It also extends prior research around corporate governance changes that occurred in the UK.

Details

Journal of Accounting & Organizational Change, vol. 13 no. 4
Type: Research Article
ISSN: 1832-5912

Keywords

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