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Book part
Publication date: 9 June 2020

Anna Purwaningsih and Indra Wijaya Kusuma

This study examines associations between accrual earnings management (AEM) and real earnings management (REM), and earnings quality between countries considered under…

Abstract

This study examines associations between accrual earnings management (AEM) and real earnings management (REM), and earnings quality between countries considered under insider economics and outsider economics clusters. Countries included in the outsider economics cluster are Singapore, Malaysia, and Hong Kong. Meanwhile, countries included in the insider economics cluster are Indonesia, the Philippines, and South Korea. Earnings management practices have changed from AEM to REM since the publication of the Sarbanes Oxley Act and DFA 954 implementation of the Claws back provision policy in the United States.

Research data were obtained from the Bloomberg database, 2010–2016. Regression analysis and t-test were utilized. This study compared AEM and REM to determine which is stronger based on country clusters, as well as the association between AEM or REM and earnings quality.

The results of this study indicate that AEM and REM are associated with the quality of earnings in the insider economics cluster. However, AEM and REM are not associated with earnings quality in the outsider economics cluster. Furthermore, associations between AEM and earnings quality are stronger than associations between REM and earnings quality in insider economics cluster.

Article
Publication date: 23 November 2022

Jung Eun “JP” Park, Yiding Wang and Sijing Wei

Employees, as internal stakeholders, not only play significant roles in a company’s operations but are also important users of a company’s financial information. However…

Abstract

Purpose

Employees, as internal stakeholders, not only play significant roles in a company’s operations but are also important users of a company’s financial information. However, prior accounting research to date has not explored whether employees incorporate a firm’s ability to meet earnings benchmarks in forming and revising their perceptions of firms. This study aims to focus on whether a firm’s ability to meet relevant earnings benchmarks impacts employees’ perceptions.

Design/methodology/approach

The authors use employees’ perception scores from the 100 Best Companies to Work for from 1998 to 2015. The authors conduct an empirical study to examine the impact of beating earnings benchmarks on the perceptions of employees by estimating regression analyses. The dependent variable is employee perceptions of the firm. The variables of interest are the earnings growth and the analyst forecast benchmarks. The authors control for earnings performance and other determinants of employees’ perceptions.

Findings

The authors find that beating the earnings benchmarks is relevant for employees but has different impacts on the employees’ perceptions of firms. Specifically, both level and change analyses suggest that a firm’s ability to beat the earnings growth benchmark affects employees’ perceptions. However, the authors find no associations between employees’ perceptions and the analyst forecast benchmarks.

Research limitations/implications

The authors recognize the amount of variation among the two groups’ perceptions from the binary variable creates an inherent limitation that the authors examine the best firms in terms of employee perceptions compared to the second-best firms. Therefore, the authors create another measure, EMPLOYEE_PERCEPTION2, which equals one if the firm’s ranking is within the top quartile and zero if the firm’s ranking is within the bottom quartile. This new variable increases the variation of employees’ perceptions in the sample to address the inherent limitation by allowing us to compare the best firms to the worst firms in the sample.

Originality/value

The study highlights the importance of beating earnings benchmarks for employees as a broader group of stakeholders. The study contributes to accounting benchmarks literature by exploring a different group of earnings benchmarks users. The authors also contribute to psychology studies by providing empirical evidence on the previously untested, intuitive prediction that employees’ views depend on a firm’s ability to meet relevant earnings benchmarks.

Details

Pacific Accounting Review, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0114-0582

Keywords

Article
Publication date: 21 November 2022

Stavros Degiannakis, George Giannopoulos, Salma Ibrahim and Bjørn N. Jørgensen

The authors propose an alternative robust technique to test for discontinuities in distributions and provide consistent evidence of discontinuities around zero for both…

Abstract

Purpose

The authors propose an alternative robust technique to test for discontinuities in distributions and provide consistent evidence of discontinuities around zero for both scaled and unscaled earnings levels and changes. The advantage of the proposed test is that it does not rely on arbitrary choice of bin width choices.

Design/methodology/approach

To evaluate the power of the test, the authors examine the density function of non-discretionary earnings and detect no evidence of discontinuities around zero in levels and changes of these non-discretionary earnings. As robustness, the authors use pre-managed earnings excluding accrual and real manipulation and find similar evidence.

Findings

The finding using our technique support the Burgstahler and Dichev (1997) interpretation on earnings management, even for smaller sample sizes and reject the theory that discontinuities arise from scaling and sampling methods.

Originality/value

The study provides an overview of those studies that support and those that oppose using “testing for discontinuities” as a way to examine earnings management. The authors advance the literature by providing an alternative methodology supporting the view that the kink in the distribution represents earnings management.

Details

Journal of Accounting Literature, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0737-4607

Keywords

Article
Publication date: 7 November 2022

Kriengkrai Boonlert-U-Thai and Philipp Schaberl

The purpose of this study is to investigate the role of book values, earnings, and future earnings in equity valuation by time, life cycle stage, and market uncertainty…

Abstract

Purpose

The purpose of this study is to investigate the role of book values, earnings, and future earnings in equity valuation by time, life cycle stage, and market uncertainty using samples of USA and Japanese companies.

Design/methodology/approach

This study employs Lubberink and Willett (2021) methodology in using log-linear models to estimate the value relevance of accounting numbers and follows Schaberl (2016) approach to measure %incremental value relevance. The study also includes future earnings in a basic valuation model (Ohlson, 1995) to explore the extent to which stock prices are forward looking.

Findings

This study finds a significant increase by time in the relative value relevance of a combined model with book values and earnings and a combined model with future earnings for both countries. However, the incremental value relevance of book values, earnings, and future earnings remain stable over time. The results by life cycle stage indicate that incremental value relevance of future earnings and earnings are more (less) pronounced for firms in the intro (mature) life cycle stage while the incremental value relevance of book values is highest for firms in the decline stage for both countries. The results by market uncertainty indicate that firms with high market uncertainty display higher incremental value relevance of book values for both countries. The results on future earnings are mixed as USA (Japan) firms with high (low) market uncertainty display more (less) incremental value relevance of future earnings.

Practical implications

The findings in this study enhance the merits of two basic financial statements (balance sheet and income statement) in a firm's equity valuation for potential investors and existing shareholders and document an additional role of future earnings information in reflecting a firm's stock price, which is beyond what book values and current earnings have already contributed.

Originality/value

This is the first study that uses log-linear models to estimate the value relevance of accounting numbers and investigates value relevance of accounting information in three views: time, life cycle stage, and market uncertainty.

Details

Asian Review of Accounting, vol. 30 no. 5
Type: Research Article
ISSN: 1321-7348

Keywords

Article
Publication date: 15 November 2022

Muhammad Tahir, Haslindar Ibrahim, Badal Khan and Riaz Ahmed

This study aims to investigate the impact of exchange rate volatility and the risk of expropriation on the decision to repatriate foreign earnings.

Abstract

Purpose

This study aims to investigate the impact of exchange rate volatility and the risk of expropriation on the decision to repatriate foreign earnings.

Design/methodology/approach

The current study uses secondary data for foreign subsidiaries of US multinational corporations (MNCs) in 40 countries from 2004 to 2016. We use the dynamic panel difference generalised method of moments (GMM) to estimate the dynamic earnings repatriation model.

Findings

The findings show that foreign subsidiaries of US MNCs in countries with volatile exchange rates tend to repatriate more earnings to the parent company. The findings also reveal that a greater risk of expropriation in the host country leads to the higher repatriation of foreign earnings to the parent company. The findings support the notion that MNCs use the earnings repatriation policy as a means of mitigating risks arising in the host country.

Practical implications

Practical implications for modern managers include shedding light on how financial managers can use earnings repatriation policy to mitigate exchange rate risk and the risk of expropriation in the host country. The findings also contain policy implications at the host country level that how exchange rate volatility and risk of expropriation can reduce foreign investment in the host country.

Originality/value

This study adds to the earnings repatriation literature by analysing the direct effect of exchange rate volatility on earnings repatriation decisions, as opposed to the impact of the exchange rate itself, as suggested by previous research. Hence, the findings broaden our understanding of the direct influence of exchange rate volatility on the decision to repatriate foreign earnings. The present study also examines the role of the risk of expropriation in determining earnings repatriation policy, which has received little attention in prior empirical studies.

Details

Journal of Economic and Administrative Sciences, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1026-4116

Keywords

Article
Publication date: 24 October 2022

Wei-Kang Wang, Wen-Min Lu, Irene Wei Kiong Ting and Wun-Ya Siao

This study aims to examine the relationships among International Financial Reporting Standards (IFRS) adoption, earnings management, and corporate efficiency.

Abstract

Purpose

This study aims to examine the relationships among International Financial Reporting Standards (IFRS) adoption, earnings management, and corporate efficiency.

Design/methodology/approach

First, the authors employ the epsilon-based measure (EBM) of the data envelopment analysis to measure the corporate performance of the Taiwanese electronics industry from 2011 to 2014. Second, the authors regress the IFRS adoption and earnings management on corporate efficiency.

Findings

The findings show that the corporate efficiency deteriorated after IFRS adoption. Although the regression analysis shows that the relationship between earnings management and corporate efficiency is significantly positive, the authors find that IFRS adoption is effective in unveiling earnings management. Moreover, IFRS adoption moderates the impact earnings management and corporate efficiency.

Research limitations/implications

This study provides reference for decision-makers in the application of accounting principles and in the understanding of the IFRS impact adoption.

Practical implications

IFRS adoption can either facilitate or limit the earnings management that would affect corporate efficiency significantly and help the electronics industry as well as investors to know the changes in accounting principles and their effects on corporate efficiency.

Originality/value

The authors use the EBM of efficiency model to measure corporate efficiency and employ the modified Jones model to measure earnings management.

Details

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

Keywords

Article
Publication date: 25 October 2022

Md Mahmudul Hasan, Md Safayat Hossain and Giorgio Gotti

This study aims to examine whether and how managerial ability is associated with the relation between product market competition and earnings management. The authors argue…

Abstract

Purpose

This study aims to examine whether and how managerial ability is associated with the relation between product market competition and earnings management. The authors argue that high-ability managers may moderate the underlying relations in both directions, and they are likely to trade off relative costs between accrual-based earnings management (AEM) and real earnings management (REM).

Design/methodology/approach

This study uses ordinary least square regressions to examine the association of managerial ability on the relations between product market competition and earnings management. The paper follows prior literature to measure managerial ability, product market competition and earnings management.

Findings

This study shows empirical evidence that high-ability managers in high-competition industries are likely to engage in AEM but less likely to engage in REM. These findings overall indicate that high-ability managers in high-competition industries trade-off between different forms of earnings management based on their relative costliness and choose the one that is relatively less costly.

Practical implications

This study has important practical implications as the findings identify situations when important stakeholders, such as the board of directors and investors, may take precautions to prevent managers’ opportunistic behaviors. The findings of this study also might be helpful for firms when it comes to selecting managers. The findings may provide some input to the firms in considering the risks and benefits trade-offs of recruiting a high versus low-ability manager in a more or less competitive environment.

Originality/value

The findings of this study show new insight into how managerial ability moderates the relation between product market competition and different types (i.e. accrual-based and real activity-based) of earnings management.

Details

Review of Accounting and Finance, vol. 21 no. 5
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 11 October 2022

Wei Jiang, Pureum Kim and Myungsoo Son

The purpose of this study is to examine whether non-generally accepted accounting principles (GAAP) earnings disclosed by firms headquartered in high religious areas…

Abstract

Purpose

The purpose of this study is to examine whether non-generally accepted accounting principles (GAAP) earnings disclosed by firms headquartered in high religious areas (religious firms) are more informative. The non-GAAP disclosure is voluntary and not subject to external audits, and it is difficult to verify the accuracy ex post, which provides management with incentives to strategically use non-GAAP reporting. This study examines religiosity as a potential governance mechanism that reduces management opportunism.

Design/methodology/approach

Using a comprehensive sample from 2010 to 2018, the authors conduct univariate analyses and regression tests. Religiosity is measured by the number of religious adherents in the Metropolitan Statistical Areas of a firm’s headquarter location.

Findings

This study finds that religious firms disclose non-GAAP earnings more frequently compared to non-religious firms. This study further documents that religiosity is negatively associated with aggressive non-GAAP reporting. It also finds that items excluded by religious firms in calculating non-GAAP earnings are less associated with future performance, suggesting that these excluded items are transient and, thus, of higher quality. Finally, the market returns on unexpected non-GAAP earnings (i.e. earnings response coefficients) are greater for religious firms. Overall, the results of this study show that non-GAAP reporting by religious firms is more likely to be informative rather than opportunistic.

Research limitations/implications

Despite the authors’ best endeavors, this study does not fully address the issue of endogeneity, and therefore, the results of this study must be interpreted as strong association rather than causation.

Practical implications

Religious social norms (regional level) can complement a firm’s corporate governance and ethical codes (firm level) by attenuating undesirable, opportunistic management practices. These findings should be informative to investors who assess the quality non-GAAP disclosures. The findings of this study are also relevant to regulators [e.g. the Securities and Exchange Commission (SEC)] when they allocate limited resources. The SEC may use less resources for monitoring firms headquartered in religious areas and apply the saved resources on monitoring riskier firms.

Originality/value

To the best of the authors’ knowledge, this is the first study to show that religiosity may act as a potential monitoring mechanism that attenuates aggressive non-GAAP earnings and enhances the informativeness of non-GAAP. The findings of this study suggest that religious social norms (regional level) can complement a firm’s corporate governance and ethical codes (firm level) by restricting undesirable, opportunistic management practices.

Details

Managerial Auditing Journal, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 24 October 2022

Yosra Mnif and Imen Cherif

The purpose of this paper is twofold. First, this study examines the relationship between the presence of a female (rather than a male) audit partner and the client firm’s…

Abstract

Purpose

The purpose of this paper is twofold. First, this study examines the relationship between the presence of a female (rather than a male) audit partner and the client firm’s accruals quality. Second, this study explores whether and how the female audit partners’ specific attributes influence the gendered auditor effect on the quality of the client firm’s accruals quality (if it exists).

Design/methodology/approach

Research hypotheses have been tested by conducting both univariate and multivariate empirical analyses based on a large sample of firm-year observations from the Swedish Corporation for the years 2010–2019. During the sample timeframe, the client firms have been audited by 56 female and 231 male audit partners.

Findings

The research findings first indicate that client firms of female audit partners are associated with downward earnings management, indicating a beneficial female auditor effect on client firm’s accruals quality. Results from the audit partner change analysis exhibit that the adverse female auditor effect on the client firm’s earnings management, and hence, the beneficial female auditor effect on the client firm’s accruals quality occurs from the first year of the assignment of a female audit partner to replace a male audit partner. When looking at how specific attributes of female audit partners influence accruals quality of their audited clients, this study reveals that the favorable female auditor effect on the client firm’s accruals quality holds constant for all the female audit partners’ specific attributes included in the researched models. This underscores that the mere presence of a female audit partner constrains earnings management and enhances, thereby, the client firm’s accruals quality.

Originality/value

This research supports regulators calling for the appointment of more women to the audit firms’ leading ranks (e.g. leadership).

Details

Meditari Accountancy Research, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2049-372X

Keywords

Article
Publication date: 24 October 2022

Huy Viet Hoang, Son Tung Ha, Manh Linh Tran and Thi Thu Trang Nguyen

This study examines the effect of audit quality on earnings management to beat earnings targets among Chinese listed firms, taking into account the firms’ corporate social…

Abstract

Purpose

This study examines the effect of audit quality on earnings management to beat earnings targets among Chinese listed firms, taking into account the firms’ corporate social responsibility (CSR) practice.

Design/methodology/approach

The sample consists of all A-shares listed in the Chinese stock market from 2001 to 2019, except firms in the financial industry. Probit estimator is employed to observe the effect of audit quality, proxied by a binary variable indicating whether a firm is audited by a Big 4 audit firm, on the behavior of earnings management to beat earnings targets. Industry and year fixed effects are incorporated into the models to control for differences among industries and time periods.

Findings

The result of this study reveals that audit quality disciplines earnings management to beat earnings targets in Chinese firms. This result holds across different specification and endogeneity tests. The authors further find that auditors seem to be more tolerant to earnings-managed firms that actively disclose CSR activities. However, this moderating effect of CSR disclosure only exists among firms that manage earnings less aggressively.

Practical implications

The findings of this study suggest that market participants should be mindful of the earnings management phenomenon and make their investment decisions after carefully dissecting and confirming the truthfulness of firms’ financial reporting. Regulators should raise the requirement on the capacity of auditing services to ensure the quality of the audit outcome.

Originality/value

This study is the first to investigate the effect of audit quality on earnings management to beat earnings targets in Chinese firms. Moreover, this study pioneers in observing the moderating effect of CSR disclosure on the relationship between audit quality and earnings management.

Details

Asian Review of Accounting, vol. 30 no. 5
Type: Research Article
ISSN: 1321-7348

Keywords

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