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1 – 10 of over 2000Eric Owusu Boahen and Emmanuel Constantine Mamatzakis
There are variations in religious social norms and legal environments around the world. In this paper, we aim to examine the interaction between variations in religious social…
Abstract
Purpose
There are variations in religious social norms and legal environments around the world. In this paper, we aim to examine the interaction between variations in religious social norms and legal environments on real activities manipulations and expense misclassification using a global sample of 63 countries. Our inquiry is motivated by a paucity of research on the interaction between legal environment and religion on earnings management practices in an international setting.
Design/methodology/approach
This study draws on a global sample of 63 countries to examine the effect of variations in religious social norms and legal environments on the trade-off between expense misclassification and real activities earnings management practices. Firm-specific financial data come from Global Compustat. Religion data are obtained from World Values Surveys of the World Bank. We obtain legal environment scores from the International Country Risk Guide.
Findings
Findings suggest that the interaction between law and religion serves as constraints on both classification shifting and real activities manipulation around the world. We find that religion strengthens the weak legal environment and the strong legal environment strengthens the weak religious environment to decrease both real activities manipulation and classification shifting when law and religion interact in an international setting. Therefore, our results contradict Zang's (2012) earnings management trade-off evidence. Again, our results contradict Malikov et al.’s (2018) evidence that mandatory International Financial Reporting Standards (IFRS) adoption is associated with increased real activities manipulation.
Research limitations/implications
The study is limited to 63 countries limiting the generalizability of the findings.
Originality/value
This study provides novel evidence and shows that there is a link between law and religion. The interaction between law and religion decreases expense misclassification and real activities manipulation. We contribute that the interaction between religion and law benefits firms and increases shareholder value as real activities manipulation decreases. Therefore, strengthening the legal environment will complement religion, IFRS and other monitoring mechanisms put in place to mitigate unethical expense misclassification and real activities earnings manipulation around the world.
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Julien Le Maux and Nadia Smaili
The purpose of this study is to explore whether managers and firms engage in bundle manipulation. It examines the effect of discretionary accruals and real activities manipulation…
Abstract
Purpose
The purpose of this study is to explore whether managers and firms engage in bundle manipulation. It examines the effect of discretionary accruals and real activities manipulation on the level of complexity in annual reports.
Design/methodology/approach
The findings from the examination of the 1,435 annual reports of Canadian listed firms engaging in discretionary accruals and real activities manipulation indicate that these firms produce complex annual reports.
Findings
The authors, therefore, suggest that managers and firms use bundle manipulation, both accounting and textual, to mislead shareholders and stakeholders. The analyses also suggest that it is more difficult to detect the manipulation of real activities than discretionary accruals through textual analysis.
Originality/value
The authors propose an in-depth examination of how accruals and real activities manipulations affect the level of readability of firms’ reports. Furthermore, the authors suggest that firms engage in bundle manipulation, including accounting and textual manipulation. This paper aims to provide an in-depth analysis of the relationship between accounting and linguistic manipulations. The study suggests that investors could use the complexity of annual reports to detect earnings management. More specifically, it seems that firms engaging in discretionary accruals produce complex annual reports.
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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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Neerav Nagar and Mehul Raithatha
The authors examine whether internal corporate governance mechanisms are effective in curbing cash flow manipulation through real activities, misclassification, and timing.
Abstract
Purpose
The authors examine whether internal corporate governance mechanisms are effective in curbing cash flow manipulation through real activities, misclassification, and timing.
Design/methodology/approach
The sample comprises of firms from an emerging market, India with data for years 2004 through 2015. The authors use the methodology given in Roychowdhury (2006).
Findings
The authors find that corporate boards in India play an active role in curbing cash flow manipulation through real activities but fail to control cash flow manipulation through misclassification and timing.
Practical implications
The study suggests that corporate boards should pay more attention to the reported cash flow numbers. Regulators can reduce the opportunities available for cash flow misclassification by fixing relevant accounting and governance norms. Auditors can also help by critically focusing on the cash flow classifications presented by management.
Originality/value
This study, to the authors’ knowledge, is the first study that talks about the role of internal governance in a trade-off between different cash flow manipulation techniques.
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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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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.
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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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Augustine Donkor, Terri Trireksani and Hadrian Geri Djajadikerta
This study aims to evaluate the relationship between integrated reporting and management’s opportunistic behavior (i.e., accrual and real earnings management) and the moderating…
Abstract
Purpose
This study aims to evaluate the relationship between integrated reporting and management’s opportunistic behavior (i.e., accrual and real earnings management) and the moderating role of firm complexity.
Design/methodology/approach
Data of firms at the Johannesburg Stock Exchange were collected and analyzed. The Johannesburg Stock Exchange is currently the primary exchange that mandates the practice of integrated reporting. Regression estimation models and robustness tests were applied to the analysis.
Findings
This study concludes that integrated reporting quality reduces firms’ accrual and real earnings management practices. It further concludes that the significant negative effect of integrated reporting quality on firms’ earnings management practices is impeded by higher firm complexity.
Originality/value
This study enhances the literature on the behavioral effect of a combined financial and sustainability disclosure practice on both accrual and real earnings management, specifically targeting South Africa’s listed companies – the primary market currently mandates integrated reporting practice.
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This study aims to investigate the relationship between corporate sustainability performance and earnings management in emerging East Asian economies.
Abstract
Purpose
This study aims to investigate the relationship between corporate sustainability performance and earnings management in emerging East Asian economies.
Design/methodology/approach
The authors base on the triple bottom line approach to measure corporate sustainability performance. In terms of earnings management, two models are applied to detect real activities manipulation and discretionary accruals. The authors use panel data analysis of 410 listed non-financial firms in emerging East Asian economies from 2016 to 2020 that are collected from the Thomson Reuters Eikon database.
Findings
The authors find a negative influence of corporate sustainability performance on real activities manipulation and discretionary accruals. The findings highlight the long-term perspective of sustainable development strategies in relation to earnings management. The authors conclude that sustainable firms in emerging East Asia are less likely to engage in earnings management.
Practical implications
The study would be of interest to investors who need more detailed assessments of financial reporting quality to facilitate their investment decision-making and to policymakers who need more understanding of business practices and reporting behaviors of East Asian firms.
Originality/value
The study has shed light on the role of corporate sustainability performance in constraining earnings management and the role of corporate ethics in providing transparent and reliable financial reporting in emerging East Asian economies.
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Hussein Abdoh and Aktham Maghyereh
This study aims to validate the link between production manipulation and a firm’s performance variability (fundamentals and stock returns). It explores whether executives'…
Abstract
Purpose
This study aims to validate the link between production manipulation and a firm’s performance variability (fundamentals and stock returns). It explores whether executives' risk-taking incentives encourage production deviations around the normal level during uncertainty.
Design/methodology/approach
Utilizing panel data of manufacturing firms from Compustat over three decades, the study investigates production management practices during economic uncertainty. The Economic Policy Uncertainty Index (EPU) is employed as a key metric. The empirical strategy involves documenting the effect of economic uncertainty on overproduction and underproduction, examining the role of executive compensation and assessing the impact on risk.
Findings
The research finds that risk-taking incentives increase over/underproduction, particularly amplifying the extent of underproduction during uncertainty. Production deviation rises, indicating that firms take greater risk by engaging in abnormal business operations. The study’s results are robust against various econometric methods, emphasizing the influence of risk-taking incentives on corporate production decisions.
Research limitations/implications
While providing valuable insights, the study acknowledges inherent limitations, including factors influencing production decisions beyond risk-taking incentives. Further research could explore additional determinants for a comprehensive understanding.
Practical implications
The findings highlight the potential dark side of executive compensation that motivates suboptimal risk-taking decisions, impacting risk, cost of capital and firm performance. Policymakers and compensation committees can use these insights to design efficient systems that mitigate moral hazard problems associated with productivity changes.
Social implications
The study emphasizes the broader social implications of production manipulation under uncertainty. It prompts discussions on the ethical considerations of managerial opportunism, its potential consequences for stakeholders and market dynamics.
Originality/value
This study contributes to the literature by examining the role of economic uncertainty on production manipulation and the influence of risk-taking incentives. It extends the earnings management literature by considering real activity manipulation and emphasizing the importance of decomposing production deviation into positive and negative values.
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