scholarly journals The endogeneity of executive compensation and its impact on management discretionary behavior over financial reporting

2013 ◽  
Vol 11 (4) ◽  
pp. 818-837 ◽  
Author(s):  
Lan Sun ◽  
Martin Hovey
Keyword(s):  
At Risk ◽  
Earnings Management ◽  
Executive Compensation ◽  
Financial Reporting ◽  
Positive Association ◽  
Discretionary Accruals ◽  
Risk Compensation ◽  
Reported Earnings ◽  
The Relationship ◽  
Discretionary Behavior

Extant literature has emerged testing the relationship between executive compensation and earnings management and many these studies have documented that compensation contracts create strong incentives for management discretionary behavior over financial reporting. Previous studies also pointed out that executive compensation could be simultaneously co-determined with earnings management, suggesting a potential endogeneity problem may exist between discretionary accruals and compensation structure. Using a sample of all Australian Securities Exchange (ASX) listed companies comprising 3,326 firm-year observations encompassing the periods from 2000 to 2006, this study examines the endogeneity of executive total compensation and its various components. Applying a 2SLS model the results show a significantly negative association between expected fixed compensation (particularly expected salary) and upwards earnings management and a significantly positive association between expected at-risk compensation (particularly expected bonuses) and upwards earnings management. These findings suggest endogeneity exists in that fixed compensation and salaries provide disincentives for managers to practice aggressive earnings management whereas at-risk compensation and bonuses induce managers to employ income-increasing discretionary accruals to inflate reported earnings. This study found that executive compensation plays a role in determining earnings management activities. Executives may distort financial reporting to maximize their personal wealth if their incentives are not fully aligned with those of shareholders. Compensation committees, therefore, may gain some insight in designing compensation structures that balance the incentive to improve a firm’s performance with the incentive to earnings manipulation.

Dangling a carrot: Will level of compensation influence the behaviour of CEO with accounting background towards earnings management?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Yvonne Joseph Ason ◽  
Imbarine Bujang ◽  
Agnes Paulus Jidwin ◽  
Jamaliah Said
Keyword(s):  
Earnings Management ◽  
Executive Compensation ◽  
Design Methodology ◽  
Discretionary Accruals ◽  
Financial Data ◽  
Annual Reports ◽  
Content Type ◽  
The Relationship ◽  
Moderating Role ◽  
Do So

Purpose Prior studies had documented that CEOs with accounting backgrounds are more conservative as compared to their non-accounting backgrounds counterparts. However, prior studies also suggested that CEOs with accounting backgrounds tend to engage in earnings management activities because they have the knowledge to do so. Motivated by these findings, this study aims to examine empirically the possibility of executive compensation to play a moderating role in influencing the behaviour of CEO with accounting backgrounds towards earnings management. Design/methodology/approach This study uses the data from 2013 to 2017 from Malaysian FTSE Top 30 companies. The data on the education backgrounds of the CEOs were collected manually from the companies’ annual reports. CEOs with accounting qualification was coded 1, and 0, otherwise. The earnings management were the discretionary accruals estimated using the modified Jones (1991) model. Meanwhile, the data on executive compensation was also collected manually from the companies’ annual reports. All other governance data were also collected manually from the annual reports, and financial data was collected using the Thompson Reuters DataStream application. Findings This study found that compensation suffered multicollinearity with the CEO accounting background, thus ineligible to act as a moderating variable between the latter and earnings management. The result further documented a negative but insignificant relationship between compensation with earnings management. Originality/value This study discusses the possibility of executive compensation as a moderating variable in the relationship between CEOs with accounting backgrounds and earnings management, whereby, to the authors’ best knowledge, such a discussion is limited in the existing literature.

scholarly journals The Causes and Effects of Earnings Management on Stock Prices

2019 ◽  
Vol 25 (116) ◽  
pp. 93-110
Author(s):  
Kawa Wali ◽  
Sabhi Saleh ◽  
Kees Van Paridon
Keyword(s):  
Corporate Governance ◽  
The Netherlands ◽  
Earnings Management ◽  
Stock Returns ◽  
Financial Reporting ◽  
Stock Prices ◽  
Cash Flows ◽  
Corporate Reporting ◽  
Reported Earnings ◽  
The Relationship

This study uses the performance of the discretionary estimation models by using a sample of listed companies in the Netherlands and Germany. The actual accounting framework provides a wide opportunity for managers to influence data in financial reporting. The corporate reporting strategy, the way managers use their discretionary accounting, has a significant effect on the company's financial reporting. The authors contribute to the literature through enhancement to these models to accomplish better effects of identifying earnings management as well as to present evidence that is particular to the Dutch and German setting. For this, we followed the methodology of Dechow, Sloan, and Sweeney (1995) and Chan et al. (2006) and test which model can detect Dutch and German firm’s earnings management better by applying those models to the artificially manipulated earnings after adding some amount to the reported earnings. This investigation found that earnings are managed relatively more in Germany than in the Netherlands. The relationship between earnings management, stock returns, and corporate governance has been tested. Our results suggested that the strong or weak impact of corporate governance in these two countries varied. The multi-sectoral Jones model has a modest illustrative capacity. Finally, the results show that maximum discretionary accruals involve a large number of estimated errors which have foreseeable effect on income, stock returns and future cash flows. The decrease in level of earnings management indicates that the measurement error has been largely eliminated in the estimated performance -related accruals.

scholarly journals The impact of executive compensation and audit quality on accrual-based and real-based earnings management: Evidence from Jordan

2018 ◽  
Vol 15 ◽  
pp. 209-219
Author(s):  
Mohammad M. Alhadab
Keyword(s):  
Earnings Management ◽  
Executive Compensation ◽  
Audit Quality ◽  
Real Earnings Management ◽  
Prior Literature ◽  
Reported Earnings ◽  
The Impact ◽  
New Evidence ◽  
The Relationship

This study investigates the relationship between executive compensation, audit quality, and accrual and real earnings management in Jordan. While prior literature focuses on examining the impact of audit quality on accrual earnings management in Jordan, this study contributes to the literature by investigating the impact of executive compensation on real earnings management activities in Jordan. Further, this study contributes to the literature by investigating the impact of audit quality on real earnings management. By examining a Jordanian sample of 445 firm-year observations over the period from 2000 to 2011, this study presents new evidence that executive compensation is positively associated with accrual earnings management, suggesting that managers engage in accrual earnings management to increase reported earnings and, therefore, increase their pay-performance compensation. Further, the results show that managers who engaged in a higher level of real earnings management (via sales-based manipulation) received a lower level of compensation, suggesting that managers in Jordan are punished for the use of real activities. In terms of audit quality, the results show no evidence that audit quality is associated with accrual and real earnings management in Jordan. This study uses the corrected model of Jones (1991) as suggested by Dechow et al. (1995) is to estimate normal accruals, while the models of Roychowdhury (2006) are used to estimate real earnings management activities.

scholarly journals Determination of earnings management: An application in BISTKazanç yönetiminin tespiti: BIST’de bir uygulama

2016 ◽  
Vol 13 (3) ◽  
pp. 6080
Author(s):  
Meral Gündüz
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Manufacturing Industry ◽  
Discretionary Accruals ◽  
Financial Information ◽  
Accounting System ◽  
Reporting Process ◽  
Management Application ◽  
Jones Model

Companies, by use of the flexibility of alternative applications in accounting system, apply profit management by organizing the financial tables unequal to the real situations. Profit management is to interfere external financial reporting process in order to gain special profits. With profit management, the main aim is to affect decisions and plans of the investors and the other financial information usersEarnings management is a kind of management which uses accounting techniques to meet the executives needs for earnings; it is a widely debated topic, hence it is worth looking at. Experts and professionals in this area found many approaches to detect the earnings management; within these approaches are the accrual-based models which include the modified Jones model, which currently is a favourite model to many researchers. In the study is aim to determine the earnings management application the data of 81 companies which were in business in Istanbul stock market (BIST-100) manufacturing industry between the years 2013-2015 is used. In this study regression analysis was made by using Modified Jones model and investigated whether their earnings management application or not , has also targeted to determine the companies applying for earnings management.The distribution of the average of discretionary accruals calculated for years as each company is analyzed; average of discretionary accruals shows a normal distribution, in this situation, It was concluded that there was no impact on the economic development of total accruals, depending on the establisded regression model. It can be expressed that the companies were in tendency to increase revenues for 2014 year and to decrease in revenue for 2013 and 2015 years.  In addition, companies which tend to manipulation in this study were identified. Özetİşletmeler, muhasebe sistemindeki alternatif uygulamaların sağladığı esneklikten yararlanarak, finansal tabloları gerçekte olduğundan farklı gösterecek şekilde düzenlemek suretiyle kazanç yönetimi uygularlar. Kazanç yönetimi, özel kazançlar elde etmeye yönelik dışsal finansal raporlama sürecine bu amaçlara uygun olarak müdahale etmektir. Kazanç yönetimi ile yatırımcıların ve diğer finansal bilgi kullanıcılarının karar ve düşüncelerini etkilemek amaçlanmaktadır.Kazanç yönetimi, yöneticilerin kazanç ihtiyaçlarını karşılamak amacıyla kullandıkları çok tartışılan bu yüzden araştırılmaya değer bir yöntemdir. Bu alanda uzman ve profesyoneller kazanç yönetimini tespit etmek için birçok yaklaşımı bulmuşlardır ki bu yaklaşımlar arasında birçok araştırmacı tarafından favori model kabul edilen tahakkuk esaslı Düzeltilmiş Jones Modelidir.Kazanç yönetimi uygulamalarının belirlenmesini amaçlayan bu çalışmada, BİST 100 endeksindeki 81 şirketin 2013-2015 yılları arasındaki verilerinden faydalanılmıştır. Araştırmada literatürde yer alan Düzeltilmiş Jones Modeli kullanılarak regresyon analizi yapılmış ve bu yöntemle şirketlerin kazanç yönetimi uygulaması yapıp yapmadığı araştırılmış, ayrıca kazanç yönetimi uygulayan şirketlerin belirlenmesine yönelik çalışma hedeflenmiştir. Yıllar itibariyle her bir şirket için hesaplanan ihtiyari tahakkukların ortalamalarının dağılımı incelendiğinde; ihtiyari tahakkukların ortalamalarının normal dağılım gösterdiği, bu durumunda kurulan regresyon modeline bağlı olarak toplam tahakkuklar üzerinde ekonomik gelişmelerin bir etkisinin olmadığı sonucuna varılmıştır.  Analiz sonucuna göre şirketlerin 2013 ve 2015 yıllarında gelir azaltıcı ve 2014 yılında gelir artırıcı bir manipülasyon eğiliminde oldukları ifade edilebilir. Ayrıca bu çalışmada kazanç yönetimi eğiliminde olan şirketler belirlenmiştir.

scholarly journals Earnings Management And Privatisations: Evidence From Pakistan Evidence From Pakistan

2015 ◽  
Vol 54 (2) ◽  
pp. 79-96 ◽  
Author(s):  
Abdullah Muhammad Iqbal ◽  
Iram Khan ◽  
Zeeshan Ahmed
Keyword(s):  
Earnings Management ◽  
Discretionary Accruals ◽  
Cash Flows ◽  
Jel Classification ◽  
Short Term ◽  
Jones Model ◽  
Reported Earnings

This study examines the incidence of earnings management around the time of the privatisation of State Owned Enterprises in Pakistan during 1991-2005. Using the modified Jones model and a sample of large privatisations (minimum US$1 million), it shows that the sampled firms experienced increase in earnings, decrease in cash flows, and increase in current discretionary accruals in the year prior to and/or in the year of privatisation. The SOEs used both short term and long term accruals to inflate reported earnings. These accruals were reversed in the post-privatisation period. These findings suggest that managers of the firms slated for privatisation were engaged in earnings management to inflate their firms‘ financial worth to maximise the privatisation proceeds. Hence, we cannot reject the incidence of earnings management during privatisations in Pakistan. The results imply that the investors should carefully evaluate the to-be-privatised firms and keep in view the possibility of earnings management by the SOEs. JEL Classification: G14, G34, G38, L33, M41 Keywords: Earnings Management, Privatisations, SOEs, Pakistan, Accruals

scholarly journals Effects Of Key Financial Indicators On Earnings Management In Korea’s Ready Mixed Concrete Industry

2017 ◽  
Vol 33 (2) ◽  
pp. 329-342 ◽  
Author(s):  
Geun Bae Jang ◽  
Weon-Jae Kim
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Accounting Information ◽  
Cash Flows ◽  
Financial Indicators ◽  
Ability Level ◽  
Operating Income ◽  
The Relationship ◽  
Ready Mixed Concrete ◽  
Mixed Concrete

Earnings management is the practice of deriving certain benefits by intervening in external financial reporting or misleading certain stakeholders through adjustments to accruals without cash flow involvement or with affecting cash flows through real activities. Using the models of Kothari et al. (2005) and Cohen et al. (2008) for accrual-based earnings management (AEM) and real activities earnings management (REM), respectively, we examined whether relationships exist between key financial indicators, such as cash flows from operations, operating income, and debt dependency level, and AEM and REM in the ready mixed concrete (RMC) industry in Korea. This study is the first to investigate earnings management in Korea’s RMC sector. Results showed that operating income and cash flows from operations are significantly negatively related to AEM and REM, consistent with the findings of previous research. By contrast, debt dependency exhibits no significant relationship with AEM and REM, contradicting the findings of most previous studies. As a moderating variable, operating income affects the relationship between cash flows from operations and earnings management with only REM. On these bases, we can infer that earnings management in the Korean RMC industry responds differently to key financial indicators with regards to AEM and REM practice. Overall, companies in the industry implement aggressive earnings management depending on operating income and cash generation ability level rather than debt dependency level. These findings provide important insights for people who are interested in accounting information on the RMC industry in Korea.

UKURAN KANTOR AKUNTAN PUBLIK, DISCRETIONARY ACCRUALS DAN OPINI AUDIT GOING CONCERN

2019 ◽  
Vol 15 (1) ◽  
pp. 11
Author(s):  
Ravaela Amba Masiku ◽  
Christine Novita Dewi
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Stock Exchange ◽  
Discretionary Accruals ◽  
Audit Firm ◽  
Going Concern ◽  
Discretionary Accrual ◽  
Audit Firms ◽  
Going Concern Opinion ◽  
Positive Effect

The purpose of this study is to examine auditor’s concervatism in term of their reaction to client’s earnings management behavior and their limitations to issue the going concern opinions (GCO). The population of this study consists of 672 observations from 69 companies are listed on the Indonesia Stock Exchange (BEI) during 2012-2017. The author used the modified Jones model to measure discretionary accruals as a proxy of earnings management. The results of this study indicate that size of audit firm has a positive effect to discretionary accrual. Companies that have been audited by the Big4 tend to apply discretionary accrual in their financial reporting than companies audited by Non-Big4. Further, to strenghten the first hypothesis, we examine the effect of discretionary accruals and going concern opinion on companies that audited by audit firms Big4 lower than companies that audited by audit firms Non-Big4. We found that the result is consistent with the first hypothesis. Keywords : auditor reputation, discretionary accruals, going concern opinion, audit firm  ABSTRAK Tujuan dari penelitian ini adalah untuk menguji konservatisme auditor dalam hal reaksi auditor terhadap akrual diskresioner yang dilakukan oleh perusahaan dan keterbatasan auditor untuk menerbitkan opini Going Concern (GC). Populasi penelitian terdiri dari 672 pengamatan dari 69 perusahaan yang terdaftar di Bursa Efek Indonesia (BEI) selama tahun 2012-2017. Penulis menggunakan model modifikasi Jones untuk mengukur akrual diskresioner sebagai proksi manajemen laba. Hasil dari penelitian ini menjelaskan bahwa ukuran kantor akuntan publik berpengaruh positif terhadap akrual diskresioner, hal tersebut diperkuat dengan pengaruh akrual diskresioner dan opini audit going concern yang diaudit oleh kantor akuntan publik Big4 lebih rendah dari perusahaan yang tidak diaudit oleh kantor akuntan publik Non-Big4. Kata kunci : reputasi auditor, akrual diskresioner, opini audit going concern, kantor akuntan publik

The Influence of Country-Level Religiosity on Accounting Conservatism

2018 ◽  
Vol 18 (1) ◽  
pp. 1-26 ◽  
Author(s):  
Matt Bjornsen ◽  
Chuong Do ◽  
Thomas C. Omer
Keyword(s):  
Financial Reporting ◽  
Stock Price ◽  
Positive Association ◽  
Accounting Conservatism ◽  
Data Availability ◽  
Country Level ◽  
Legal Enforcement ◽  
Prior Literature ◽  
Reported Earnings ◽  
High Degree

ABSTRACT This study investigates how religiosity (i.e., the strength of religion) differences across countries influence an important characteristic of financial reporting, accounting conservatism. Prior literature suggests that religious individuals are more risk averse and have higher ethical standards, while accounting conservatism has been shown to reduce various risks to the firm (e.g., bankruptcy and stock price crashes) at the expense of higher reported earnings. We find that managers in more religious societies report more conservatively. Specifically, our cross-country analysis reveals that firms headquartered in countries with higher levels of religiosity exhibit, on average, higher accounting conservatism in financial reporting. This positive association is stronger in countries following IFRS or U.S. GAAP, and weaker in countries with a high degree of uncertainty avoidance, strong legal enforcement, and countries with greater numbers of religions. JEL Classifications: G34; M41; Z12. Data Availability: Data are available from the public sources cited in the text.

Earnings Management and Stock Liquidity

2021 ◽  
pp. 66-84
Author(s):  
Hakan Özkaya
Keyword(s):  
Stock Market ◽  
Earnings Management ◽  
Trading Volume ◽  
Management Practices ◽  
Positive Association ◽  
Discretionary Accruals ◽  
Market Liquidity ◽  
Stock Liquidity ◽  
Turnover Ratio ◽  
Liquidity Measures

This chapter tests whether the earnings management practices in Turkey are considered informative or opportunistic by outside investors by examining its effect on stock liquidity. Earnings management is measured by discretionary accruals calculated by two different competing methods. Stock liquidity is also proxied by two different measures: the illiquidity measure of Amihud and the turnover ratio. Amihud's illiquidity measure indicates firms' daily price responses associated with the trading volume and the turnover ratio indicates how many times a stock changes its owner in a year. Relevant control variables are also included in the models. A positive association between earnings management and stock liquidity implies informative earnings management and vice versa. Earnings management is found to be positively associated with stock market liquidity. Results favor the informative earnings management view for Turkish firms and are robust to alternative specifications of earnings management and stock liquidity measures.

scholarly journals CEO Characteristics and Real Earnings Management in Jordan

2020 ◽  
Vol 11 (4) ◽  
pp. 255
Author(s):  
Mohammad Abedalrahman Alhmood ◽  
Hasnah Shaari ◽  
Redhwan Al-dhamari
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Stock Exchange ◽  
Reporting Quality ◽  
Personal Characteristics ◽  
Positive Association ◽  
Real Earnings Management ◽  
Board Structure ◽  
Political Connection ◽  
Ceo Characteristics

The Chief Executive Officer (CEOs) tends to be the most influential member of a corporation as they exert control over corporate decisions such as financial disclosure, board structure, and company performance in ensuring enhanced corporate performance and earnings. The issue of earnings management (EM) that has captured the attention of researchers may be among the most critical factors that are linked to financial statement manipulation. Therefore, the current study explored the effects of the personal characteristics of CEOs on real earnings management (REM) practices in Jordan. Data of 58 companies listed on the Amman Stock Exchange for six years from 2013 to 2018 were utilised to achieve this study’s objectives. The results of this study revealed that CEOs’ experience had a significantly positive association with REM. Meanwhile, CEOs’ tenure had no impact on REM among Jordanian firms. Also, the results exposed the presence of a significantly negative association between CEO duality and REM. Finally, CEOs’ political connection was found to have a significantly positive association with REM. This study offers empirical evidence on the effect of CEO characteristics on REM and how such characteristics can lead to exploitation, which brings an impact on the financial reporting quality.

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