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Article
Publication date: 27 September 2021

Alex Johanes Simamora

This paper aims to examine the effect of managerial ability (MA) on real earnings management and the effect of real earnings management by higher ability managers on…

Abstract

Purpose

This paper aims to examine the effect of managerial ability (MA) on real earnings management and the effect of real earnings management by higher ability managers on future profitability, at a different level of the crime rate.

Design/methodology/approach

The research sample includes 864 manufacturing firms-years listed on the Indonesian Stock Exchange. MA uses an efficiency score by data envelopment analysis. Real earnings management is measured by abnormal activities. The crime rate is measured by logarithm natural of the number of crimes per 100.000 citizens in the region where the firm is headquartered. Data analysis uses fixed-effect regression.

Findings

MA increases real earnings management in the region where the firm is headquartered with a higher crime rate while MA will reduce real earnings management in the region where the firm is headquartered with a lower crime rate. Also, real earnings management by higher-ability managers gives a signal of better future profitability in the region where the firm is headquartered with a lower crime rate.

Originality/value

This research contributes to filling the previous gap of managerial characteristics ability-related on real earnings management by providing regional crime rate as a determinant factor of managers’ ethical behavior. This research is the first one to considers the regional crime rate treatment to the relationship between MA and real earnings management especially in Indonesia. This research also provides new evidence of efficient real earnings management for a lower crime rate group of samples to give a signal of better future profitability.

Details

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

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Article
Publication date: 20 December 2017

Feng Jui Hsu and Yu-Cheng Chen

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

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Abstract

Purpose

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.

Design/methodology/approach

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.

Findings

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.

Originality/value

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.

Open Access
Article
Publication date: 29 December 2020

Glenny Alawag

This paper aims to understand real earnings management behavior in the context of a parent–subsidiary relationship. It explores the differences between business groups and…

Abstract

Purpose

This paper aims to understand real earnings management behavior in the context of a parent–subsidiary relationship. It explores the differences between business groups and firms that do not have controlled subsidiaries and provides potential explanations for any measured difference.

Design/methodology/approach

The study uses the random-effects generalized least squares (GLS) estimation to find the difference between the real earnings management behavior of business groups, represented by the ultimate parent firms and the nonparent firms from 73 countries.

Findings

The results show that ultimate parent firms have lower abnormal production costs and abnormal discretionary expenses than nonparent firms. In contrast, parent firms have higher abnormal cash flow from operations (CFO) than nonparent firms. The results are unexpected because abnormal production costs usually have a dominant direct relationship with abnormal CFO. The results indicate that business groups use a route different from manipulating production costs and discretionary expenses.

Research limitations/implications

The results reveal that parent firms use a route different from manipulating production costs and discretionary expenses. The results can be used to extend the discussion to specific business group cases, such as tracing the route or allocation of real earnings management (REM) pressure from a parent firm to its listed and private subsidiaries, and if the consolidation of minority voting rights and the transitivity of control affect the behavior in its subsidiaries.

Originality/value

Instead of the degree of diversification or affiliation, this paper investigates REM behavior based on the parent firm's control of its subsidiaries. With this approach, the study argues that business groups prefer a route other than manipulating production costs and discretionary expenses. The results may redirect the attention of regulators to the activities of parent firms that need more policing.

Details

Asian Journal of Accounting Research, vol. 6 no. 2
Type: Research Article
ISSN: 2443-4175

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Article
Publication date: 26 August 2014

Prapaporn Kiattikulwattana

The purpose of this paper is to investigate the relationship between voluntary disclosure of a statement of management's responsibility for the financial reports (MRF) and…

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2378

Abstract

Purpose

The purpose of this paper is to investigate the relationship between voluntary disclosure of a statement of management's responsibility for the financial reports (MRF) and earnings management, both accrual and real earnings management, in firms listed on the Stock Exchange of Thailand (SET).

Design/methodology/approach

The samples in this study are selected from listed companies on the SET in the year 2009. The multiple regression are used to test hypotheses.

Findings

The results show that the inclusion of a MRF has no association with both discretionary accrual and real earnings management activities (i.e. sales manipulation, a decrease in discretionary expenditures, and overproduction). The findings from the study reveal that firms with or without the MRF manipulate their earnings in a similar manner.

Research limitations/implications

The sample for the study includes Thai listed firms in the year 2009 only. The small sample size may limit the validity of generalizations from these conclusions.

Practical implications

Based on the results, the regulators will know that the voluntary disclosure of management responsibilities on the financial reports is an ineffective tool to control earnings management.

Social implications

Like Sarbanes-Oxley Act 2002, a disclosure of management responsibilities on the financial reports should be required by the Securities and Exchange Commission of Thailand.

Originality/value

Investors will know that firms with or without the MRF manipulate their earnings in a similar manner. The voluntary disclosure of an MRF in Thailand does not guarantee earnings quality.

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Article
Publication date: 11 July 2019

Sun Guangguo, Sun Ruiqi and Li Hezun

The existence of controlling shareholders creates a remarkable difference between the corporate governance structures of Chinese firms and those of western firms. Despite…

Abstract

Purpose

The existence of controlling shareholders creates a remarkable difference between the corporate governance structures of Chinese firms and those of western firms. Despite the increasing importance of controlling shareholders, it remains disputable whether they are playing the “tunneling” roles or the “governance” roles. Therefore, more research is needed on what roles controlling shareholders are playing and how they play their roles. Previous empirical studies document a common phenomenon that directors play dual roles both on the board and in the top management team. Because of information asymmetry, the board of directors may not be able to perform its supervisory and strategic decision-making functions. Therefore, this paper aims to investigate whether controlling shareholders participate in firm management by appointing the executive directors and examine the economic consequences of controlling shareholder involvement.

Design/methodology/approach

In the empirical tests, the authors use the split share structure reform in China as a natural experiment. Using the data from Chinese listed firms between 2001 and 2015 and difference-in-differences analysis, the authors examine the impact of the split share structure reform on the executive directors of controlling shareholders and the governance effect of controlling shareholders’ appointing executive directors to the management.

Findings

The authors find that controlling shareholders get involved in firm management by appointing executive directors to strengthen the supervision and incentives of managers. The authors also find that firms exhibit a lower level of earnings management and enhance and higher pay-performance sensitivity after controlling shareholders appoint executive directors to the top management team.

Originality/value

As the natural experiment of the split share structure reform enables us to mitigate endogeneity, the authors investigate the channels through, which controlling shareholders get involved in firm management from the unique perspective of executive director appointment. The study expands the literature on corporate governance and board functions. The findings provide new insights to the effect of controlling shareholder governance and casts light on a new way for controlling shareholders of Chinese firms to participate in firm management – by appointing executive directors.

Details

Nankai Business Review International, vol. 10 no. 4
Type: Research Article
ISSN: 2040-8749

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Article
Publication date: 19 November 2018

Mahdi Salehi, Mahbubeh Mahmoudabadi and Mohammad Sadegh Adibian

The purpose of this paper is to evaluate the qualitative effect of corporate governance components, in the form of managerial entrenchment index, on earnings management

Abstract

Purpose

The purpose of this paper is to evaluate the qualitative effect of corporate governance components, in the form of managerial entrenchment index, on earnings management and innovation.

Design/methodology/approach

In this study, the variable of managerial entrenchment, which includes the variables of management independence, dual role of management, management tenure, the board compensation and the board ownership percentage, was initially estimated through the exploratory factor analysis and its effect was evaluated on the dependent variables of the study using the test of multivariable regressions. Hence, a total of 103 listed companies on the Tehran Stock Exchange were selected and analyzed during 2011–2016. In this paper, the Jones model is used as the variable of accrued earnings management and for calculating the real earnings management, the models of abnormal operational cash flows, abnormal production costs and abnormal optional costs are employed. Moreover, the research and development cost to total costs ratio is used for calculating the innovation.

Findings

The results indicate a negative and significant relationship between managerial entrenchment and accrual-based earnings management; moreover, the entrenched managers are less likely to engage in manipulating the real activities accruals in Iran context. Furthermore, the findings show that there is a positive and significant relationship between managerial entrenchment and firm innovation.

Originality/value

What really sets this paper apart from other studies is that this research will make aware investors and stakeholders of this fact that managerial entrenchment will be a good way to diminish the manipulation of financial reporting and improve the corporate situation in emerging markets, particularly those bazaars facing with economic sanctions such as Iran. Undeniably, the study results will complete the knowledge gap between the developed economies and the emerging markets.

Details

International Journal of Productivity and Performance Management, vol. 67 no. 9
Type: Research Article
ISSN: 1741-0401

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Article
Publication date: 2 September 2019

Peterson K. Ozili

The purpose of this study is to examine the impact of the reclassification of International accounting standard (IAS) 39 on income smoothing using loan loss provisions…

Abstract

Purpose

The purpose of this study is to examine the impact of the reclassification of International accounting standard (IAS) 39 on income smoothing using loan loss provisions among European banks.

Design/methodology/approach

Regression methodology is used to determine the extent of income smoothing using loan loss provisions before and after IAS 39 reclassification. The authors predict that the strict recognition and re-classification requirements of IAS 139 reduced banks’ ability to smooth income using bank securities and derivatives, motivating them to rely more on loan loss provisions to smooth income. The authors test this hypothesis over a sample of 114 European banking institutions over the period 2005 to 2013.

Findings

The findings do not support the prediction for income smoothing through loan loss provisions. Also, there is no evidence for income smoothing in the pre- and post-IAS 39 reclassification period.

Research limitations/implications

The implication of the findings is that the European banks did not use loan loss provisions to smooth income during the period examined, and rather rely on other accounting numbers to smooth income. This implies that the International Accounting Standards Board’s strict disclosure regulation improved the reliability and informativeness of loan loss provision estimates among European banks during the period of analysis.

Originality/value

This study is the first attempt to analyze the effect of IAS 39 re-classification on bank’s ability to smooth income in Europe.

Details

Journal of Financial Reporting and Accounting, vol. 17 no. 3
Type: Research Article
ISSN: 1985-2517

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Article
Publication date: 9 January 2020

Nan Xu, Hanyi Tian and Jing Cai

The purpose of this study is to investigate the impact of non-founder CEO succession on firms’ research and development (R&D) decision, and further explore its mechanism…

Abstract

Purpose

The purpose of this study is to investigate the impact of non-founder CEO succession on firms’ research and development (R&D) decision, and further explore its mechanism and economic consequences.

Design/methodology/approach

Using founders’ personal-level information of entrepreneurial firms in the Chinese growth enterprise market from 2009 to 2015, the authors empirically investigate whether firms can be motivated to launch more R&D activities as the result of switching to non-founder CEOs. The author’s further test the impact of non-founder CEOs on R&D output to distinguish their motivation. Moreover, the authors use stepwise regression to explore the mechanism and possible channels.

Findings

The authors find that R&D investment significantly increases in firms with non-founder CEOs and the R&D output that comes in the form of patent exhibits an upward trending in numbers, too, ruling out non-founder CEOs’ incentive to chase private benefits. Specifically, the authors find that non-founder CEOs can promote R&D investment through their more professional human capital and better internal control. The authors also show mitigating effects under different circumstances on the relationship between non-founder CEOs and R&D investment.

Practical implications

This study helps the authors to understand the impact of non-founder CEO succession on R&D investment in emerging markets. It also indicates that human capital of non-founder CEOs is critical in driving firms’ innovation, proposing policy suggestions to improve formal intermediary labor market of professional CEOs.

Originality/value

This study provides elaborate theoretical analysis and empirical tests on the mechanism and economic consequences of (non-)founders’ impact on R&D activities.

Details

Nankai Business Review International, vol. 11 no. 2
Type: Research Article
ISSN: 2040-8749

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Article
Publication date: 1 July 1977

John S. Evans

A striking feature of Jaques' work is his “no nonsense” attitude to the “manager‐subordinate” relationship. His blunt account of the origins of this relationship seems at…

Abstract

A striking feature of Jaques' work is his “no nonsense” attitude to the “manager‐subordinate” relationship. His blunt account of the origins of this relationship seems at first sight to place him in the legalistic “principles of management” camp rather than in the ranks of the subtler “people centred” schools. We shall see before long how misleading such first impressions can be, for Jaques is not making simplistic assumptions about the human psyche. But he certainly sees no point in agonising over the mechanism of association which brings organisations and work‐groups into being when the facts of life are perfectly straightforward and there is no need to be squeamish about them.

Details

Management Decision, vol. 15 no. 7/8
Type: Research Article
ISSN: 0025-1747

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Article
Publication date: 8 May 2017

Khalid Al-Amri, Saif Al Shidi, Munther Al Busaidi and Serkan Akguc

The purpose of this paper is to examine the use of real earnings management by private and public firms in a unique institutional setting, which is the Gulf Cooperation…

Abstract

Purpose

The purpose of this paper is to examine the use of real earnings management by private and public firms in a unique institutional setting, which is the Gulf Cooperation Council (GCC) countries. The paper also compares the level of real earnings management between public and private firms in the GCC area.

Design/methodology/approach

The GCC area is a unique setting to investigate the use of real earnings management because of the low enforcement of reporting standards and supervisory rules, lack of sophisticated financial analysis, specialized media tools and high concentration of capital ownership. The authors use different models of real earnings management proposed by Roychowdhury, 2006, cash flow management, productions cost management and discretionary expenses management to examine the use of real earnings management.

Findings

The paper documents evidence consistent with private and public firms using real earnings management to influence their earnings figures. The paper also shows that the level of real earnings management is higher for private firms compared to public firms when cash flow management and discretionary expenses management models are used. The production cost model results show evidence consistent with public firms only engaging in real earnings management through production cost reduction.

Research limitations/implications

The results of this study might not be applicable to other emerging markets.

Practical implications

The findings of this study should promote a general understanding of firms’ behavior in unique environment such as GCC countries. Regulators in the GCC region should be aware that real earnings management techniques have been used by firms and that extra caution is required when auditing or analyzing the financial information of private and public firms in the GCC market.

Originality/value

This paper contributes to the literature in many aspects. First, it provides additional evidence on the use of earnings management in unique market contexts outside the USA and Europe. The GCC markets share many common characteristics that make them interesting settings to be investigated. Second, this paper adds more evidence on the use of earnings management between public and private firms. In this regard, the paper adds additional evidence in the discussions proposed by Ball and Shivakumar (2005) and Givoly et al. (2010) who use two competing perspectives to investigate earnings quality in public and private firms: the demand hypothesis and the opportunistic behavior hypothesis.

Details

Journal of Applied Accounting Research, vol. 18 no. 2
Type: Research Article
ISSN: 0967-5426

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