Accrual-Based and Real Earnings Management Activities Around Seasoned Equity Offerings
Accrual-Based and Real Earnings Management Activities Around Seasoned Equity Offerings

Author: Daniel A. Cohen

Publisher:

Published: 2008

Total Pages: 49

ISBN-13:

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We examine earnings management behavior around SEOs, focusing on both real activities and accrual-based manipulation. Although research has addressed the issues of earnings management around SEOs and earnings management via real activities manipulation, ours is the first paper to put these two issues together. We make three contributions to the literature. First, we document that firms use real, as well as accrual-based, earnings management tools around SEOs. Second, we show how the tendency for firms to tradeoff real versus accrual-based earnings management activities around SEO s varies cross-sectionally. We find that firms choices vary predictably as a function of the firm s ability to use accrual management and the costs of doing so. Our model is a first step in examining how firms tradeoff between real versus accrual methods of earnings management. Third, we compare the economic costs of accrual versus real earnings management around SEO s, by examining the effect of each type of earnings management on the firm s future performance. We provide the first evidence on this important issue by showing that the costs of real earnings management are likely greater than the costs of accrual earnings management, at least in the SEO context.

Earnings Management. The Influence of Real and Accrual-Based Earnings Management on Earnings Quality
Earnings Management. The Influence of Real and Accrual-Based Earnings Management on Earnings Quality

Author:

Publisher: GRIN Verlag

Published: 2024-01-31

Total Pages: 81

ISBN-13: 3964875953

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Master's Thesis from the year 2019 in the subject Business economics - Accounting and Taxes, University of Duisburg-Essen, course: Master Thesis, language: English, abstract: This paper delves into various theories and approaches, aiming to define and differentiate earnings management from related concepts such as fraud, expectation management, and impression management. It explores the goals and incentives driving earnings management, including maximizing or minimizing earnings, beating targets, and smoothing. At the onset of the new millennium, corporate scandals rocked the business world, eroding trust in management, boards of directors, and the accounting profession. In response, regulations and policies aimed at enhancing corporate governance and financial reporting were swiftly implemented. The credibility, clarity, and consistency of financial reporting practices play a pivotal role in enabling investors to make informed decisions. Accurate and fair financial performance representations, as opposed to inflated and misleading figures, are essential for market players, including shareholders and creditors. Investors rely on audited financial reports to guide their investment decisions, underscoring the critical importance of accuracy and reliability in publicly available financial disclosures. Auditors, by reducing the risk of material misstatement, ensure the integrity of the information disclosed in a company's financial statements. Management, with the goal of achieving promised targets and ensuring the company's existence, may engage in earnings management as a strategic contribution to corporate policy. Financial reporting serves as a means to distinguish well-performing companies from their counterparts, facilitating efficient resource allocation and empowering stakeholders to make effective decisions. The disclosed earnings results significantly impact a firm's overall business activities and management decisions, particularly in satisfying analysts' expectations, which can influence equity value. While accounting standards play a role, the quality of financial statements is more influenced by company-specific and institutional factors shaping managers' incentives. These factors lead to financial reporting practices being viewed as the outcome of a cost-benefit assessment.

Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes Oxley Periods
Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes Oxley Periods

Author: Daniel A. Cohen

Publisher:

Published: 2008

Total Pages: 52

ISBN-13:

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We document that accrual-based earnings management increased steadily from 1987 until the passage of the Sarbanes Oxley Act (SOX) in 2002, followed by a significant decline after the passage of SOX. Conversely, the level of real earnings management activities declined prior to SOX and increased significantly after the passage of SOX, suggesting that firms switched from accrual-based to real earnings management methods after the passage of SOX. We also find evidence that the accrual-based earnings management activities were particularly high in the period immediately preceding SOX. Consistent with these results, we find that firms that just achieved important earnings benchmarks used less accruals and more real earnings management after SOX when compared to similar firms before SOX. Finally, our analysis provides evidence that the increases in accrual-based earnings management in the period preceding SOX were concurrent with increases in the fraction of equity based compensation.

Accrual-Based and Real Earnings Management in Dynamic Settings
Accrual-Based and Real Earnings Management in Dynamic Settings

Author: Yutaro Murakami

Publisher:

Published: 2015

Total Pages: 43

ISBN-13:

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This paper develops a simple model to examine the dynamic relationship between earnings management and accounting regulations. In this model, current accrual-based earnings management affects the tightness of future regulations and managers rationally choose the levels of both accrual-based and real earnings management. We compare this dynamic model with the static one where the tightness of regulations is not affected by past levels of accrual-based earnings management and is, thus, constant over time. Our analysis reveals that accounting regulations directly affect relative costs of accrual-based and real earnings management in both static and dynamic settings, which is consistent with prior empirical and analytical studies. More importantly, we find that the impact of the change in manager's time horizon may be different for static and dynamic models of regulations. We also find that the initial state of the economy affects how managers adjust the levels of earnings management over time.

Accrual-Based and Real Earnings Management Before and After IFRS Adoption
Accrual-Based and Real Earnings Management Before and After IFRS Adoption

Author: Aikaterini Ferentinou

Publisher:

Published: 2016

Total Pages:

ISBN-13:

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Purpose: The aim of this study is to examine the use of accrual-based vs. real earnings management by Greek firms, before and after the mandatory adoption of International Financial Reporting Standards (IFRS). The research is motivated by the fact that past studies have indicated the existence of significant levels of earnings management (EM) for Greece in particular before IFRS.Design/methodology/approach: Accrual-based earnings management (AEM) is examined by assessing performance-adjusted discretionary accruals, while real earnings management (REM) is defined in terms of abnormal levels of production costs, discretionary expenses, and cash flows from operations, for a three-year period before and after the adoption of IFRS in 2005.Findings: We find evidence on a statistically significant shift from AEM to REM after the adoption of IFRS, indicating the replacement of one form of EM with the other. Research limitations/implications: The validity of the results depends on the ability of the empirical models used to efficiently capture the existence of AEM and REM.Practical implications: IFRS adoption aims to improve accounting quality, especially in countries with high need for such an improvement; however, the tendency to substitute one form of EM with another highlights unintended consequences of IFRS adoption, which do not improve the informational content of financial statements if EM continues under different forms.Originality/value: Under the expectation that IFRS adoption should lead to improvements in accounting quality, this study examines whether IFRS actually led to a reduction of EM practices for a country with exceptionally high levels of EM before IFRS, by accounting for all possible forms of EM.

Accrual-Based and Real Earnings Management and Political Connections
Accrual-Based and Real Earnings Management and Political Connections

Author: Geert Braam

Publisher:

Published: 2015

Total Pages: 47

ISBN-13:

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This study examines whether the trade-off between real and accrual-based management strategies differs between firms with and without political connections. We argue that politically-connected firms are more likely to substitute real earnings management for accrual-based earnings management than non-connected firms. Although real earnings management is more costly, we expect that politically connected firms prefer this strategy because of its higher secrecy and potential to mask political favors. Using a unique panel data set of 5,493 publicly traded firms in 30 countries, our results show that politically-connected firms are more likely to substitute real earnings management strategies for accrual-based earnings management strategies than non-connected firms. We also find that when public monitoring and therefore the risk of detection increases, politically connected firms are more likely to resort to less detectable real earnings management strategies. Our finding that political connections play a significant role in the choice between accrual-based and real earnings management strategies suggests that a focus only on accrual-based measurements underestimates the total earnings management activities of politically-connected firms.

Introduction to Earnings Management
Introduction to Earnings Management

Author: Malek El Diri

Publisher: Springer

Published: 2017-08-20

Total Pages: 120

ISBN-13: 3319626868

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This book provides researchers and scholars with a comprehensive and up-to-date analysis of earnings management theory and literature. While it raises new questions for future research, the book can be also helpful to other parties who rely on financial reporting in making decisions like regulators, policy makers, shareholders, investors, and gatekeepers e.g., auditors and analysts. The book summarizes the existing literature and provides insight into new areas of research such as the differences between earnings management, fraud, earnings quality, impression management, and expectation management; the trade-off between earnings management activities; the special measures of earnings management; and the classification of earnings management motives based on a comprehensive theoretical framework.

Accrual-Based and Real Earnings Management
Accrual-Based and Real Earnings Management

Author: Masahiro Enomoto

Publisher:

Published: 2017

Total Pages: 40

ISBN-13:

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This paper examines the differences in accrual-based and real earnings management across countries from the perspective of investor protection. Following prior research (Leuz et al., 2003), we hypothesize that accrual-based earnings management is more constrained by strict discipline in countries with stronger investor protection. For real earnings management in countries with stronger investor protection, we have two hypotheses. One is that real earnings management is more often implemented to substitute for accrual-based earnings management. The other is that real earnings management is less often implemented, as with accrual-based earnings management. Our examination uses data from 222,513 firm-year observations drawn from 38 countries covering 1991 to 2010. The results show that managers in countries with stronger investor protection tend to engage in real earnings management instead of accrual-based earnings management. We also find that real earnings management is constrained by analyst following. Our results are not affected by the control of audit quality or the calculation method used for earnings management measures according to country and year.