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Article
Publication date: 25 January 2024

Adhitya Agri Putra and Doddy Setiawan

This research paper aims to examine the effect of chief executive officer (CEO) characteristics on earnings management.

Abstract

Purpose

This research paper aims to examine the effect of chief executive officer (CEO) characteristics on earnings management.

Design/methodology/approach

Research samples are manufacturing firms listed in the Indonesian Stock Exchange 2015–2021. CEO characteristics include narcissism, gender, age, tenure, experience, nationality and founding family status. Data analysis uses random-effect regression.

Findings

The result shows that higher narcissism CEOs have aggressive characteristics so they will be more likely to engage in accrual and real earnings management. Female CEOs, foreign CEOs and founding-family CEOs have higher monitoring and business ethics characteristics so they will be less likely to engage in accrual and real earnings management. CEOs with higher education levels have higher thinking complexity so they will be more likely to engage in accrual earnings management with higher regulator and auditor monitoring barriers than real earnings management. CEOs with financial and accounting experience are familiar with accounting standards and auditor monitoring barriers so they will be more likely to engage in accrual earnings management than real earnings management. On the other hand, there are no effects of CEO age and tenure on earnings management.

Originality/value

This research contributes to providing evidence of the effect of CEO characteristics on earnings management in a specific industry such as manufacturing firms and emerging markets such as Indonesia with the majority group firms being family firms.

Details

Corporate Governance: The International Journal of Business in Society, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1472-0701

Keywords

Book part
Publication date: 18 July 2017

Nana Y. Amoah, Anthony Anderson, Isaac Bonaparte and Alex P. Tang

This study examines the relation between internal control material weakness (ICMW) under Section 404 of the Sarbanes-Oxley Act (SOX) and real earnings management. Our measures of…

Abstract

This study examines the relation between internal control material weakness (ICMW) under Section 404 of the Sarbanes-Oxley Act (SOX) and real earnings management. Our measures of real earnings management are abnormal cash flow from operations (ABCFOs), abnormal discretionary expenses (ABDISEXP), and abnormal production cost (ABPROD). We use a sample of 1,824 manufacturing firms over the period 2004–2011 to run regressions of ABCFO, ABDISEXP, and ABPROD on ICMW and other independent variables. We find that ICMW is negatively associated with ABCFOs. Another result that emerges from this study is a positive relation between ICMW and ABPROD. Our results imply that manufacturing firms with materially weak internal controls predominantly use overproduction and excessive price discounts to manage operational activities to achieve earnings targets. As SOX Section 404 is designed to reduce the instances of firms having ICMW, our finding that ICMW firms engage in real earnings management suggests that the use of real earnings management could be reduced as SOX Section 404 succeeds in reducing ICMW.

Details

Parables, Myths and Risks
Type: Book
ISBN: 978-1-78714-534-4

Keywords

Open Access
Article
Publication date: 29 November 2023

Daniel Kipkirong Tarus and Fiona Jepkosgei Korir

This paper examines how board structure influences real earnings management and the interaction effect of CEO narcissism on board structure-real earnings management relationship.

Abstract

Purpose

This paper examines how board structure influences real earnings management and the interaction effect of CEO narcissism on board structure-real earnings management relationship.

Design/methodology/approach

The authors used panel data derived from secondary sources from publicly listed firms in Kenya during 2002–2017. Hierarchical regression analysis was used to test the hypotheses.

Findings

The results indicate that board independence, board tenure and size have significant negative effect on real earnings management, while CEO duality positively affects real earnings management. Further, the interaction results show that CEO narcissism moderates the relationship between CEO duality and real earnings management.

Research limitations/implications

The results suggest that real earnings management reduces when boards are independent, large and comprising of long-tenured members. However, when the CEO plays dual role of a chairman, real earnings management increases. The authors also find that when CEOs are narcissists, the monitoring role of the board is compromised.

Originality/value

The study adds value to the understanding of how board structure and CEO narcissism influence the monitoring role of the board among firms listed at Nairobi Securities Exchange.

Details

PSU Research Review, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2399-1747

Keywords

Open Access
Article
Publication date: 27 July 2023

Samir Trabelsi and Amna Chalwati

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

Abstract

Purpose

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

Design/methodology/approach

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

Findings

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.

Practical implications

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

Originality/value

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.

Details

China Accounting and Finance Review, vol. 25 no. 4
Type: Research Article
ISSN: 1029-807X

Keywords

Article
Publication date: 26 August 2022

Thi Thu Ha Nguyen, Salma Ibrahim and George Giannopoulos

The use of models for detecting earnings management in the academic literature, using accrual and real manipulation, is commonplace. The purpose of the current study is to compare…

Abstract

Purpose

The use of models for detecting earnings management in the academic literature, using accrual and real manipulation, is commonplace. The purpose of the current study is to compare the power of these models in a United Kingdom (UK) sample of 19,424 firm-year observations during the period 1991–2018. The authors include artificially-induced manipulation of revenues and expenses between zero and ten percent of total assets to random samples of 500 firm-year observations within the full sample. The authors use two alternative samples, one with no reversal of manipulation (sample 1) and one with reversal in the following year (sample 2).

Design/methodology/approach

The authors include artificially induced manipulation of revenues and expenses between zero and ten percent of total assets to random samples of 500 firm-year observations within the full sample.

Findings

The authors find that real earnings manipulation models have lower power than accrual earnings manipulation models, when manipulating discretionary expenses and revenues. Furthermore, the real earnings manipulation model to detect overproduction has high misspecification, resulting in artificially inflating the power of the model. The authors examine an alternative model to detect discretionary expense manipulation that generates higher power than the Roychowdhury (2006) model. Modified real manipulation models (Srivastava, 2019) are used as robustness and the authors find these to be more misspecified in some cases but less in others. The authors extend the analysis to a setting in which earnings management is known to occur, i.e. around benchmark-beating and find consistent evidence of accrual and some forms of real manipulation in this sample using all models examined.

Research limitations/implications

This study contributes to the literature by providing evidence of misspecification of currently used models to detect real accounts manipulation.

Practical implications

Based on the findings, the authors recommend caution in interpreting any findings when using these models in future research.

Originality/value

The findings address the earnings management literature, guided by the agency theory.

Details

Journal of Applied Accounting Research, vol. 24 no. 2
Type: Research Article
ISSN: 0967-5426

Keywords

Article
Publication date: 1 November 2022

Lei Zhu, Wanyi Chen and Qianwen Zheng

Emerging markets are characterized by weak institutions and strong relationships, which give rise to different market characteristics in supply chain relationships. This study…

Abstract

Purpose

Emerging markets are characterized by weak institutions and strong relationships, which give rise to different market characteristics in supply chain relationships. This study investigates the impact of customer concentration on suppliers' real earnings management.

Design/methodology/approach

Based on China's relationship-based transaction, this study selects 2007–2019 Shenzhen and Shanghai Stock Exchange A-share manufacturing listed companies as the research samples. The empirical analysis is derived from the ordinary least square regression model with industry and year fixed effects, and cross-sectional analysis is used for further analysis.

Findings

It is found that the higher the degree of customer concentration, the more likely a company is to engage in real earnings management mainly through discretionary expenses instead of accrual-based earnings management. Further research shows that when suppliers provide customers with higher commercial credit and make more relationship-specific investments, and when major customers are also major suppliers, the effect of customer concentration on real earnings management is more significant. It can be seen from the results that high customer concentration is beneficial for suppliers to cooperate with major customers in emerging markets.

Originality/value

This research expands the relationship between customer relationship-based transaction and earnings management from the perspective of collaboration. These conclusions are of great significance for market regulators to reform information disclosure related to customers and for participants to pay attention to the composition of major customers of the company.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

Keywords

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…

1404

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

Keywords

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.

2021

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

Keywords

Article
Publication date: 6 November 2017

Kais Baatour, Hakim Ben Othman and Khaled Hussainey

The study aims to examine the effect of multiple directorships on accrual-based earnings management and real earnings management. It analyses whether earnings management practices…

1800

Abstract

Purpose

The study aims to examine the effect of multiple directorships on accrual-based earnings management and real earnings management. It analyses whether earnings management practices in the Saudi context increase or decrease with the average number of multiple directorships.

Design/methodology/approach

The study uses the approach by Roychowdhury (2006) to capture the level of real earnings management and uses the cross-sectional model by Jones (1991) to measure accrual-based earnings management.

Findings

The paper provides partial evidence supporting the “busyness” hypothesis where earnings management practices increase with the number of multiple directorships. The evidence shows that multiple directorships have a positive and significant effect on real earnings management in the Kingdom of Saudi Arabia. However, we find no significant impact of multiple directorships on accrual-based earnings management.

Originality/value

This is the first study that empirically investigates the relationship between multiple directorships and earnings management in the Kingdom of Saudi Arabia. The paper contributes to the limited literature on multiple directorships in developing countries by examining their impact on opportunistic real earnings management.

Article
Publication date: 28 April 2022

Sondes Draief and Adel Chouaya

The aim of this study is to investigate whether debt maturity matters for the choice of earnings management strategy (i.e. accruals earnings management and real earnings management

Abstract

Purpose

The aim of this study is to investigate whether debt maturity matters for the choice of earnings management strategy (i.e. accruals earnings management and real earnings management).

Design/methodology/approach

The sample involves 486 American listed firms extracted from fortune 1,000 over the period 2006–2014. Panel data regression models are employed to empirically test the impact of short-term debt and long-term debt on manager's choice of earnings management form. The generalized least square technique is applied to estimate the parameters of the regression models.

Findings

The results show that managers are more likely to manage earnings through real activities and reduce their use of accruals earnings management once short debt is increasing because the latter induces heavy lender's scrutiny. The managers move hence to real earnings management due to a lower possibility of being discovered. Moreover, the results reveal a simultaneous use of accruals earnings management and real earnings management for firms with high long-term debt. This finding highlights that long-term debt does not produce regular lender's enforcement allowing managers to use both earnings management techniques to reach earnings targets.

Research limitations/implications

This research has two limitations. Like many other studies, the measure of discretionary accruals is subject to measurement errors. Moreover, the sample exclusively involves large firms extracted from Fortune 1,000. Therefore, the attained results may be not available for small and medium firms.

Practical implications

The findings have implications for both researchers and lenders. For researchers, the present work points out that the decision about the debt maturity structure is crucial for all managers because they establish their earnings management policy accordingly. For lenders, the findings imply that increasing scrutiny effectively constrains accounting manipulations but does not eliminate earnings management activities altogether. The managers move to another earnings management strategy (i.e. real earnings management). This evidence may support the lenders and the creditors in their decision-making processes.

Originality/value

This paper adds to the accounting literature by providing new and interesting evidence on the role of debt maturity on the trade-off between the earnings management tools. Prior studies provided mixed finding for the issue of earnings management in levered firms. The findings of this study should be viewed as a first step to understand the mixed results on this issue. While most papers focus on one earnings management form when they examine the earnings management in levered firms, the authors highlight the impact of debt on both accruals and real earnings management simultaneously.

Details

Managerial Finance, vol. 48 no. 7
Type: Research Article
ISSN: 0307-4358

Keywords

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