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.

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 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.

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
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.

Real Earnings Management and Accrual-Based Earnings Management in Family Firms
Real Earnings Management and Accrual-Based Earnings Management in Family Firms

Author: Ann-Kristin Achleitner

Publisher:

Published: 2019

Total Pages:

ISBN-13:

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We examine the effects of family firms on real earnings management (REM) and accrual-based earnings management (ABEM). Using socioemotional wealth (SEW) as a theoretical framework and considering the different implications of REM and ABEM on family firms' transgenerational sustainability, we hypothesize and find for a sample of 402 German listed family firms during 1998-2008, that family firms engage less in REM and exhibit more earnings-decreasing ABEM policies as compared to a sample of 436 non-family firms. We further provide evidence that family firms as compared to non-family firms treat REM and ABEM as substitute rather than complementary tools for earnings management. Overall, our findings suggest that family firms use earnings management activities strategically, avoiding those that inhibit the firm's long-term value (i.e. REM) and engaging in those that help families retain transgenerational control (i.e. ABEM).

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.