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1 – 10 of over 1000Samir 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.
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Bilal Ahmad Elsalem, Fekri Ali Shawtari, Ahmad Mohammed Qotba, Mohammed Bajaher and Mohammed Asseri
The purpose of this study is to examine both accruals and real earnings management in a large sample of private companies in the UK using data from 2002 to 2009 following the…
Abstract
Purpose
The purpose of this study is to examine both accruals and real earnings management in a large sample of private companies in the UK using data from 2002 to 2009 following the implementation of the UK Act of 2006.
Design/methodology/approach
A panel data analysis using GMM has been adopted to examine the objectives of the study and answer the research questions.
Findings
The results of this study showed that the imposition of the Companies Act of 2006, on its own, did lead to changes in earnings management behaviour, in both accruals-based earnings and real earnings management. Moreover, this study also found that firms that chose to provide IFRS financial statements tended to show less discretionary earnings management, however, it tended to have no impact on real earnings management.
Practical implications
In accordance with the research findings, standard setters with some insight tend to determine how capital markets see the information provided under the legislation such as the UK Act of 2006 in developed countries and thereby ensure long-term sustainability in a modern and sophisticated financial world. This study provides an insight into the successful implementation of the UK act of 2006, and its influence on the aspect of financial reporting.
Originality/value
The novel conclusion reached in the study is that there exists a strong and direct link between the smooth implementation of UK Act of 2006 and the practices of both accruals and real earnings management in real-world business and financial scenarios, particularly, in private companies.
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Apostolos Christopoulos, Ioannis Dokas, Christos Leontidis and Eleftherios Spyromitros
This paper attempts to investigate the effect of corruption on the real and accrual earnings management of target firms in the process of mergers and acquisitions.
Abstract
Purpose
This paper attempts to investigate the effect of corruption on the real and accrual earnings management of target firms in the process of mergers and acquisitions.
Design/methodology/approach
The sample includes target firms from the European area that participate in mergers or acquisitions announced during 2010–2020. The preliminary empirical part estimates the level of earnings management during the period two years before the deal's announcement to identify whether the sample follows the manipulation behavior that the literature suggests for target firms. The primary empirical analysis focuses on the impact of corruption on real and accrual-based earnings management proxies, employing regression models and two alternative proxies for corruption. The existing literature points out that the combination of low levels of corruption and an integrated legal system reduces earnings manipulation.
Findings
The findings provide strong evidence for systematic downwards accounting manipulation practices, whereas the findings for real earnings management are not significant. The findings of the main empirical part show that corruption is positively associated with accrual-based manipulation and negatively related to real earnings management. In essence, in economies with a high level of transparency, managers adopt the manipulation of operating activities as a less detectable practice of earnings management instead of engaging in accounting procedures.
Originality/value
This study contributes to the literature highlighting the diversification of these firms' manipulation strategies according to the national level's corruption status.
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This study aims to explore how earnings management techniques are affected by corporate financial debt risk (FDR), internal control (IC) effectiveness and CEO education.
Abstract
Purpose
This study aims to explore how earnings management techniques are affected by corporate financial debt risk (FDR), internal control (IC) effectiveness and CEO education.
Design/methodology/approach
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.
Findings
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.
Research limitations/implications
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.
Practical implications
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.
Originality/value
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.
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Håkon Bergseng Brannan, Christian Pjaaka, Are Oust and Ole Jakob Sønstebø
In periods of economic distress, expectations for businesses change and there is a heightened need for reporting quality. This study investigates the impact of crises on earnings…
Abstract
Purpose
In periods of economic distress, expectations for businesses change and there is a heightened need for reporting quality. This study investigates the impact of crises on earnings management in the real estate sector.
Design/methodology/approach
The data consisted of financial statements from 2005 to 2021 from real estate firms listed on 10 European stock exchanges. Estimated discretionary accruals from four standard accruals models were used as a proxy for earnings management, using cross-sectional industry and firm fixed effects models. The authors examined earnings management during three crises: the financial crisis (2008–2009), the debt crisis (2011–2012) and the COVID-19 pandemic (2020–2021).
Findings
The results showed less earnings management during the COVID-19 crisis and more earnings management during the financial crisis, though with slightly weaker evidence. The authors did not find significant evidence of earnings management related to the debt crisis. These results suggest that stakeholders in the real estate sector should be extra vigilant in crisis periods.
Originality/value
This study is the first to investigate earnings management in European real estate firms, focusing on the impact of crises.
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The present study aims to examine the relationship between real earnings management and earnings persistence and also to test how the group affiliation of the firms influences…
Abstract
Purpose
The present study aims to examine the relationship between real earnings management and earnings persistence and also to test how the group affiliation of the firms influences this relationship.
Design/methodology/approach
The study draws the sample of listed non-financial firms in the Indian market from the year 2011 to 2018 and applies panel least squares regression with industry and year fixed effects. Future performance of a firm is measured by one year leading value of return on assets. The interaction term of real earnings management and return on assets is used to measure the impact of real earnings management on earnings persistence. The firm-specific controlling variables are also included in the empirical model. The robustness of the results is tested by sub-dividing the sample into group affiliated and non-group affiliated firms.
Findings
The findings of the study reveal that opportunistic earnings management has a significant impact on earnings persistence when real earnings management is measured through abnormal increase in operating cash flows and abnormal reduction in discretionary expenditure. On the other hand, signalling earnings management has a significant impact on earnings persistence when real earnings management is measured through abnormal increase in the level of production. The results also reveal that REM has more negative implications on group affiliated firms compared to non-group affiliated firms supporting the theory of entrenchment effect.
Originality/value
This is the first study in the Indian context which tests the implications of real earnings management on earnings persistence by using three alternative measures of real earnings management. The study contributes to the existing literature on the implications of real earnings management in emerging markets like India.
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Ratna Candra Sari, Mahfud Sholihin, Zuhrohtun Zuhrohtun, Ida Ayu Purnama, Patriani Wahyu Dewanti and Umi Syafaatul Udhma
The purpose of this study is to examine the trade-off between accrual and real activity earnings manipulation by considering gender and punishment as one aspect of clawbacks.
Abstract
Purpose
The purpose of this study is to examine the trade-off between accrual and real activity earnings manipulation by considering gender and punishment as one aspect of clawbacks.
Design/methodology/approach
To achieve the research objectives, experimental design research was used, involving 183 professional accountants in Indonesia. This was followed by interviews with board members of public companies in Indonesia.
Findings
After the adoption of clawbacks, the intention to manipulate accruals decreased more among women than among men. However, the possible unintended consequences of clawbacks, particularly an increase in real activity manipulation, did not differ between women and men.
Originality/value
There are still few studies that use experimental designs to examine the consequences of clawback. Our study is expected to provide a novel contribution to the literature on the consequences of clawbacks as we use an experimental method. Besides, previous research that tested the consequences of clawback, using both archival and experimental data, had not considered the gender aspect, thus prompting this study to fill the research gap related to the consequences of clawback adoption by including the gender variable.
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Aklima Akter, Wan Fadzilah Wan Yusoff and Mohamad Ali Abdul-Hamid
This study aims to see the moderating effect of board diversity on the relationship between ownership structure and real earnings management.
Abstract
Purpose
This study aims to see the moderating effect of board diversity on the relationship between ownership structure and real earnings management.
Design/methodology/approach
This study uses unbalanced panel data of 75 listed energy firms (346 firm-year observations) from three South Asian emerging economies (Bangladesh, India, and Pakistan) from 2015 to 2019. The two-step system GMM estimation is used for data analysis. This study also uses fixed effect regression to obtain robust findings.
Findings
The findings show that firms with a greater ownership concentration and managerial ownership significantly reduce real earnings management. In contrast, the data refute the idea that institutional and foreign ownership affect real earnings management. We also find that board diversity interacts significantly with ownership concentration and managerial ownership, meaning that board diversity moderates the negative link of the primary relationship that reduces real earnings management. On the other hand, board diversity has no interaction with institutional and foreign ownership, implying no moderating effect exists on the primary relationship.
Originality/value
To the best of the authors’ knowledge, this is unique research investigating how different ownership structures affect real earnings management in the emerging nations’ energy sector, which the earlier studies overlook. More specifically, this research focuses on how board diversity moderates the relationships between ownership structure and real earnings management, which could be helpful for future investors.
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The purpose of this study is to examine how lenders alter their behavior when faced with real earnings management.
Abstract
Purpose
The purpose of this study is to examine how lenders alter their behavior when faced with real earnings management.
Design/methodology/approach
This study uses the incremental R-square approach as in Kim and Kross (2005) to examine how much lenders rely on income statement and balance sheet ratios as the degree of real earnings management increases.
Findings
As real earnings management affects mostly the income statement, the authors find that lenders rely less on income statement ratios in making credit decisions in the presence of real earnings management. The authors also find that lenders do not alter their reliance on balance sheet ratios when faced with real earnings management.
Originality/value
This paper is the first to study how lenders alter their reliance on financial statements in making credit decisions in the presence of real earnings management. The findings of this paper could help the regulators set standards to improve the usefulness of financial statements. The findings of this paper could also help practitioners (borrowers and lenders) understand how real earnings management affects credit decisions.
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Eduardo da Silva Flores, Joelson Oliveira Sampaio, Aziz Xavier Beiruth and Talles Vianna Brugni
The main purpose of this study is to evaluate whether the COVID-19 pandemic has stimulated earnings management among publicly traded companies in Brazil and the USA.
Abstract
Purpose
The main purpose of this study is to evaluate whether the COVID-19 pandemic has stimulated earnings management among publicly traded companies in Brazil and the USA.
Design/methodology/approach
The authors analyzed the above-mentioned effects based on 22,244 observations of Brazilian companies and 139,856 observations of American companies from 1998 to 2020. The proxy used to detect earnings management based on discretionary accruals (DAC) was obtained by using the Modified Jones Model (MJM) (Dechow et al., 1995), with adjustments suggested by Kothari et al. (2005). In accordance with previous studies (e.g. Brown et al., 2015; Enomoto et al., 2015; Galdi et al., 2020; Huang and Sun, 2017; Roychowdhury, 2006), the authors also employed a second proxy to detect earnings management through real activities associated with unusual losses for fixed assets (property, plant and equipment (PPE)).
Findings
The study’s findings indicate that the discretionary accruals of Brazilian companies varied in a more accentuated manner during the COVID-19 pandemic, making it possible to deduce that a recent history of economic depression may entail greater incentives for earnings management in an emerging economy. In addition, the authors verified that the effects of the current crisis on earnings management proxies denote a signal that is distinct from previous economic crises, which may be interpreted as an attempt to postpone the effects of the pandemic on financial statements, especially those of the Brazilian capital markets.
Originality/value
Unlike previous crises, this pandemic has led to direct restrictions on a wide variety of economic segments rather than indirect contagion due to anomalies in the financial markets, making it a phenomenon with the characteristics of a quasi-natural experiment for studies related to the quality of accounting information. Considering that both Brazil and the USA provide an opportune economic contrast, given their discrepancies in terms of economic growth over the past two decades, the researchers believe that there is an unusual opportunity to understand how earnings management can be an incentive for managers in environments where crises arose from natural causes.
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