Earnings management in V4 countries: the evidence of earnings smoothing and inflating

This study investigates whether firms continue to use tax reserves to achieve financial reporting objectives in the post-FIN 48 period and the effect of auditor-provided tax services on earnings management through tax reserves. Three types of earnings management incentives are considered in this study: meeting or beating the consensus forecasts, income smoothing, and taking an “earnings bath.” The analyses yield evidence that only non-large firms manipulate tax reserves to meet/beat earnings forecast in the post-FIN 48 period; however, tax reserves are still utilized by both large and non-large firms to smooth earnings. Moreover, evidence is provided that the auditor who provides more tax services facilitates large firms’ earnings smoothing in the post-FIN 48 period, implying independence impairment. But this behavior does not exist within non-large firms, arguably because the auditor does not compromise independence for less important clients.

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Earnings smoothing around open-market share repurchases

Review of Accounting and Finance ◽

10.1108/raf-10-2012-0111 ◽

2015 ◽

Vol 14 (1) ◽

pp. 64-80

Author(s):

Hui Di ◽

Dalia Marciukaityte

Keyword(s):

Earnings Management ◽

Market Share ◽

Discretionary Accruals ◽

Cash Flows ◽

Share Repurchases ◽

Open Market ◽

Content Type ◽

Operating Cash Flows ◽

Earnings Smoothing ◽

Open Market Share Repurchases

Purpose – The purpose of this paper is to examine whether firms engage in earnings decreasing management before share repurchases to mislead investors or to smooth earnings and improve earnings informativeness. Design/methodology/approach – The authors examine discretionary accruals and cash flows around open-market share repurchases. The primary discretionary accruals measure is industry- and performance-adjusted discretionary current accruals estimated from cash-flow data. Findings – Results show that, firms experience temporary increases in operating cash flows and use negative discretionary accruals to smooth earnings before share repurchases. Firms with the highest pre-repurchase cash flows use the lowest pre-repurchase discretionary accruals. Moreover, pre-repurchase discretionary accruals reflect expectations about future operating cash flows. Firms with the strongest deterioration in operating cash flows after repurchases use the lowest pre-repurchase discretionary accruals. These findings suggest that repurchasing firms use earnings management to increase smoothness and predictability of reported earnings rather than to mislead investors. Originality/value – This paper provides an alternative explanation to the finding of negative discretionary accruals before share repurchases. It adds to the literature on repurchases and earnings smoothing by showing that firms use earnings management around share repurchases to smooth earnings.

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Does Dividend Policy Drive Earnings Smoothing?

Accounting Horizons ◽

10.2308/acch-50764 ◽

2014 ◽

Vol 28 (3) ◽

pp. 501-528 ◽

Cited By ~ 11

Author(s):

Nan Liu ◽

Reza Espahbodi

Keyword(s):

Earnings Management ◽

Dividend Policy ◽

Earnings Persistence ◽

Spurious Correlation ◽

Earnings Smoothing ◽

Alternative Measures ◽

Jel Classifications

SYNOPSIS This paper examines the earnings-smoothing behavior of dividend-paying firms. We show that dividend-paying firms engage in more earnings smoothing than non-payers through both real activities and accrual choices. More specifically, dividend-paying firms with positive (negative) pre-managed earnings changes engage in more downward (upward) earnings management than non-payers. Additional tests suggest that the results are driven by dividend-related incentives and not the differences in the economic characteristics of dividend-paying firms, are robust to alternative measures of earnings management, and are not due to spurious correlation. We also show that earnings smoothing, in part, explains the higher earnings persistence of dividend-paying firms. These findings are consistent with a firm's dividend policy having an incremental impact on earnings-smoothing behavior. JEL Classifications: M41; G35

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The effect of earnings management through assets sales on Canadian stocks

Corporate Ownership and Control ◽

10.22495/cocv6i4c1p6 ◽

2009 ◽

Vol 6 (4) ◽

pp. 218-233 ◽

Cited By ~ 1

Author(s):

Said Elfakhani ◽

Ola Kurdi

Keyword(s):

Corporate Governance ◽

Earnings Management ◽

Positive Relationship ◽

Negative Relationship ◽

Asset Sales ◽

Earnings Per Share ◽

Fixed Assets ◽

Earnings Smoothing ◽

Equity Ratio ◽

Bonus Plans

This paper tests the earnings-smoothing and the debt-equity hypotheses using a sample of Canadian firms engaging in sales of long-lived assets and investments assets. findings show there is a negative relationship between income from asset sales and change in earnings per share exclusive of income from asset sales, as well as a positive relationship between leverage (proxied by debt-equity ratio) and income from asset sales. Yet, Canadian firms also report zero income or losses more often than gains as opposed to mostly gains from such sales reported by US firms, suggesting that they may be using asset sales proceeds for other corporate governance-related reasons than earnings smoothing, including Canadian tax policies (when selling fixed-assets), liquidity needs, avoidance of debt covenants violation, and level of management bonus plans. We also notice some differences between Canadian firms and their US counterparts that may explain some differences in their results.

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Apakah profitabiltas, risiko keuangan dan ukuran perusahaan meningkatkan praktik perataan laba perusahaan?

Journal of Business and Banking ◽

10.14414/jbb.v7i2.1235 ◽

2019 ◽

Vol 7 (2) ◽

Author(s):

Erliana Banjarnahor ◽

Khirstina Curry

Keyword(s):

Earnings Management ◽

Financial Risk ◽

Sampling Method ◽

Secondary Data ◽

Binary Logistic Regression ◽

Financial Statements ◽

Positive Influence ◽

Income Smoothing ◽

Public Company ◽

Earnings Smoothing

Earnings Management is the selection accounting policies by management to achieve certain goals. The usual way of management to influence the numbers on the financial statements is to make earnings management one of them with income smoothing. The purpose of this research is to test empirically the influence of profitability, financial risk, and company size to the practice of income smoothing. Population in this research is all public company year 2012-2016, while for sample of research use purposive sampling method, with secondary data. Methods of data analysis using binary logistic regression. The result obtained is profitability does not affect the income smoothing action. Financial risk does not affect earnings smoothing. Firm size affects earnings smoothing action. Positive influence means that if the size of the company the higher the company doing income smoothing.

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Related party transactions and accounting quality in Greece

International Journal of Accounting and Information Management ◽

10.1108/ijaim-04-2016-0044 ◽

2016 ◽

Vol 24 (4) ◽

pp. 375-390 ◽

Cited By ~ 8

Author(s):

Moataz El-Helaly

Keyword(s):

Earnings Management ◽

Design Methodology ◽

Stock Exchange ◽

Accounting Quality ◽

Content Type ◽

Related Party Transactions ◽

Earnings Smoothing ◽

Athens Stock Exchange ◽

The Relationship

Purpose The purpose of this paper is to investigate the relationship between related party transactions (RPTs) and accounting quality for the firms listed on the Athens Stock Exchange. Design/methodology/approach This paper compares accounting quality across two groups of firms. The first group contains firms that conduct material RPTs and the second group contains firms that do not conduct material RPTs. Accounting quality is measured using different proxies of earnings management. Four earnings management proxies are used, three metrics for earnings smoothing and one for managing earnings towards a target. Findings The results of the current study do not suggest that firms with significant RPTs exhibit less accounting quality compared to non-RPTs firms. Research limitations/implications The results support the argument that RPTs are conventional transactions that are mainly conducted for business purposes. Originality/value This paper contributes to the literature by examining the effect of RPTs on accounting quality in Greece and whether firms that conduct RPTs exhibit less accounting quality or not.

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How Does Intentional Earnings Smoothing Vary With Managerial Ability?

Journal of Accounting Auditing & Finance ◽

10.1177/0148558x17748405 ◽

2017 ◽

Vol 35 (2) ◽

pp. 406-437 ◽

Cited By ~ 19

Author(s):

Peter Demerjian ◽

Melissa Lewis-Western ◽

Sarah McVay

Keyword(s):

Earnings Management ◽

Capital Market ◽

Operating Performance ◽

Informed Trading ◽

Executive Turnover ◽

High Ability ◽

Managerial Ability ◽

Earnings Smoothing ◽

Market Consequences ◽

Do So

We investigate if high-ability managers are more likely to intentionally smooth earnings, a form of earnings management, and when they are more likely to do so. Although prior studies provide evidence that high-ability managers report higher quality earnings, the literature does not indicate whether this behavior is common because of (or happens in spite of) high-ability managers’ intentional smoothing activities. We find that (a) high-ability managers are significantly more likely to engage in intentional smoothing, (b) their intentional smoothing is associated with improved future operating performance, and (c) their intentional smoothing is more prevalent when the smoothing either benefits shareholders, the manager, or both. We do not, however, find evidence that high-ability managers who smooth are more likely to have engaged in informed trading or are more likely to consume perquisites. High-ability managers’ intentional smoothing is also associated with increased voluntary (but not forced) executive turnover, consistent with high-ability managers being motivated, at least in part, by how the capital market consequences of smoothing are expected to benefit shareholders, thereby bolstering their reputation.

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MOTIVASI MANAJEMEN LABA DALAM KAPITALISASI BIAYA RISET DAN PENGEMBANGAN

El Muhasaba Jurnal Akuntansi ◽

10.18860/em.v3i2.2341 ◽

2013 ◽

Vol 3 (2) ◽

Author(s):

YUSLI MARIADI ◽

SUTRISNO SUTRISNO ◽

ROSIDI ROSIDI

Keyword(s):

Earnings Management ◽

Regression Model ◽

Stock Exchange ◽

Accounting Standards ◽

Financial Accounting ◽

Manufacturing Companies ◽

Tobit Regression ◽

Earnings Smoothing ◽

Debt Covenant ◽

Tobit Regression Model

The capitalization of research and development (R&D) costs is a controversial accounting issue because of the contention that such capitalization is motivated by incentives to manipulate earnings. Indonesian Financial Accounting Standards (SAK) allows for the capitalization of R&D costs. Based on a sample of manufacturing companies of Indonesia Stock Exchange from 2009 to 2011, this study examines whether companies’ decisions to capitalize R&D costs are affected by earnings-management motivations such as earnings smoothing and to avoid violating debt-covenant. In addition, this study aims to show that the capitalization of R&D costs affects the level of firms’ earnings-management. Using a Tobit regression model to test the first and second hypotheses and linear regression model to test third hypotheses, the results show that the companies do capitalize the R&D costs for earnings-smoothing and reducing the risk of violating debt-covenants purposes. In addition, the results show that the capitalization of R&D cost affects the level of firms’ earnings-management and it is a part of earnings management.

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Earnings Management and Sale of Assets

Social and Management Research Journal ◽

10.24191/smrj.v3i1.5103 ◽

2006 ◽

Vol 3 (1) ◽

pp. 85

Author(s):

Nor'azam Mastuki ◽

Nihlah Abdullah

Keyword(s):

Earnings Management ◽

Economic Performance ◽

High Impact ◽

Net Income ◽

Significant Evidence ◽

Earnings Smoothing ◽

Debt Covenant ◽

Earning Change ◽

Asset Sale ◽

Positive Earning

The focus of this study is to examine whether firms used income from sale of assets as an instrument to manage earnings. Two aspect of earnings management are examined: earnings smoothing behavior and avoidance of debt covenant activities. A Sample had been taken from firms listed under industrial and consumer product at the main board of Bursa Malaysia from 2000 to 2003. Similar with findings obtained in an environment where current cost are applied in asset reporting, we found that incentive for earnings management is asymmetric.firms with poor economic performances (negative earnings change) have greater incentive to smooth earnings that firm exhibiting good economic performance (positive earning change). This study had also examined whether the asymmetric results holds true for firms selling asset with high impact on net income in comparison with firms selling asset with low impact on net income. an area which had not been explored by previous studies. And within this context we also found asymmetric results. Firms reporting high impact of income from asset sale in relation to net income had shown significant evidence ofearnings smoothing patterns. No evidence is found to associate earnings smoothing activities with firms reporting low impact of income from asset sale in relation to net income. However this research had failed to find evidence to associate income from asset sale with debt-equity hypothesis in all sub samples.

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The impact of IFRS on earnings management: evidence from Mexico

Journal of Accounting in Emerging Economies ◽

10.1108/jaee-11-2020-0316 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Lisa A. Eiler ◽

Jose Miranda-Lopez ◽

Isho Tama-Sweet

Keyword(s):

Earnings Management ◽

Financial Reporting ◽

Capital Market ◽

Accounting Standards ◽

The United States ◽

Managerial Incentives ◽

Income Smoothing ◽

Content Type ◽

Earnings Smoothing ◽

The Impact

PurposePrior literature investigating the adoption of International Financial Reporting Standards (IFRS) finds that managerial incentives, capital market institutions and accounting standards interact to endogenously determine accounting outcomes. In this paper, we investigate the impact of changing from local GAAP to IFRS in 2012 on earnings management by public firms in Mexico. Given the institutional environment and managerial incentives in Mexico, there is not a clear theoretical prediction for the impact of Mexico's adoption of IFRS on earnings management. Thus, it is an empirical question whether a change in accounting standards had any effect on earnings management.Design/methodology/approachWe use three measures of earnings smoothing and one measure of upwards earnings management. Logistic regression analysis along with t-tests across two time periods, pre-IFRS (2009–2011) and post-IFRS (2013–2015) are used to determine if there is a significant change in the earnings management of Mexican firms, and if this change is different for companies cross-listed in the US and companies listed only in the Bolsa.FindingsWe hypothesize and find that adopting IFRS is associated with lower earnings management via earnings smoothing in Mexico, and the reduction is greater for firms cross-listed in the United States. Our results support the contention that strong institutions and enforcement aid in the implementation of new accounting standards.Originality/valueFirst, we contribute to the literature on the adoption of IFRS around the world. The consensus in the literature is that the impact of IFRS on financial reporting is country-specific. To our knowledge, we are the first to conduct such research on Mexico. Second, our findings indicate that IFRS adoption is associated with a reduction in earnings management through income smoothing by firms in Mexico. This contributes to a small but growing body of literature documenting consequences of improvements in Mexican capital markets. Results of research in this area provide important insights to capital market participants and regulators in Mexico.

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