Discussion of Foreign Ownership and Real Earnings Management: Evidence from Japan

2015 ◽  
Vol 14 (2) ◽  
pp. 215-219
Author(s):  
Yongtae Kim
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Reporting Quality ◽  
Foreign Ownership ◽  
Cash Flows ◽  
Production Costs ◽  
Real Earnings Management ◽  
Future Research ◽  
Foreign Investors ◽  
Japanese Firms

ABSTRACT Guo, Huang, Zhang, and Zhou (2015) examine whether foreign investors encourage or limit real earnings management in Japanese firms. They find that firms with higher foreign ownership engage less in real earnings management than other firms as evidenced by higher abnormal cash flows from operations, lower abnormal production costs, and higher abnormal discretionary expenses. While the results suggest that foreign ownership and real earnings management in Japanese firms are negatively correlated, it remains unclear whether foreign investors improve the corporate governance of firms and thus limit real earnings management or that they are attracted to firms that have better governance and more transparent earnings. One fruitful avenue for future research is to examine whether the negative relation between foreign ownership and financial reporting quality reflects monitoring by foreign investors or selection.

Foreign Ownership and Real Earnings Management: Evidence from Japan

2015 ◽  
Vol 14 (2) ◽  
pp. 185-213 ◽  
Author(s):  
Jun Guo ◽  
Pinghsun Huang ◽  
Yan Zhang ◽  
Nan Zhou
Keyword(s):  
Earnings Management ◽  
Capital Market ◽  
Earnings Quality ◽  
Foreign Ownership ◽  
Production Costs ◽  
Real Earnings Management ◽  
Foreign Investors ◽  
Economic Fundamentals ◽  
Japanese Firms ◽  
Business Ties

ABSTRACT Studying a sample of Japanese firms, we examine whether foreign investors exert a significant influence on earnings management through manipulation of real activities. We find that foreign investors play an independent role in restraining real earnings management, as captured by abnormal cash flow from operations, abnormal discretionary expenses, abnormal production costs, or a composite of the aforementioned three measures. These results are robust to a variety of controls, including economic fundamentals, domestic blockholdings, governance mechanisms, and endogeneity of foreign ownership. Our findings indicate that sophisticated foreign investors, with relatively few business ties to local management, improve the accounting oversight of local firms by curbing earnings manipulation via operating activities. Collectively, our evidence suggests that one potential benefit of capital market globalization is less real earnings management in particular and higher earnings quality in general. JEL Classifications: M41; F23; G32.

scholarly journals Real earnings manipulation surrounding mergers and acquisitions: the targets’ perspective

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Tariq Zaglol Elrazaz ◽  
Moataz Elmassri ◽  
Yousry Ahmed
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Firm Heterogeneity ◽  
Reporting Quality ◽  
Fixed Effect Model ◽  
Production Costs ◽  
Real Earnings Management ◽  
Agency Conflicts ◽  
Content Type ◽  
Thomson Reuters

Purpose This paper aims to investigate whether UK public targets manage their earnings using real activities manipulation in the period prior to the announcement of a mergers and acquisition (M&A). It also examines whether the payment method in M&As affects the degree to which takeover targets manipulate earnings. Design/methodology/approach Using a sample of 131 UK listed targets acquired over the period 1995–2013, this paper examines real earnings management (REM) by employing OLS regression models. The data related to deals have been mainly collected from Thomson One Banker and Thomson Reuters Eikon databases. REM is examined by investigating abnormal cash flow from operations, abnormal discretionary expenses and abnormal production costs. This analysis was supplemented by conducting additional robustness checks. Findings The results show that UK takeover targets manage earnings upwards through cutting discretionary expenses in the year prior to the acquisition, while they do not do so by manipulating sales or production costs. Moreover, targets of cash-only or mixed-payment deals do not have the same strong motivation to manage their earnings as stock-financed deal target counterparts do. Our results continue to hold after using alternative accrual earnings management (EM) measures, controlling for unobservable firm heterogeneity using the fixed-effect model and controlling for endogeneity using the two-stage Heckman (1979) model. Practical implications The main findings of this study could be beneficial for various parties involved M&As, such as standard setters and regulators. A need arises to improve disclosure rules and enhance overall financial reporting quality in the capital markets with the aim of reducing information asymmetry and agency conflicts. Originality/value As far as the literature on EM around M&As is concerned, only EM by acquirers has been examined, and not much attention has been paid to targets’ EM.

The impact of principles-based vs rules-based accounting standards on reporting quality and earnings management

2019 ◽  
Vol 20 (1) ◽  
pp. 78-93 ◽  
Author(s):  
Dennis Sundvik
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Accounting Standards ◽  
Reporting Quality ◽  
Absolute Magnitude ◽  
Cash Flows ◽  
Real Earnings Management ◽  
Content Type ◽  
Analytical Work ◽  
The Impact

Purpose The purpose of this paper is to explore whether principles-based vs rules-based accounting standards have an effect on measures of financial reporting quality and earnings management strategies. Design/methodology/approach This study uses a firm-year-specific variable that captures the extent to which firms’ accounting and operating behavior is affected by the characteristics of a specific standard in the USA. Measures of absolute accruals, financial misconducts, signed abnormal accruals and abnormal cash flows are used to assess the effects. Findings The results show that absolute magnitude of accruals and probability of financial misconduct is lower, and accrual earnings management is higher when firms’ standards are more based on principles. The study also suggests that potentially costlier real earnings management is a consequence of rules-based standards. Research limitations/implications This study relies heavily on measures from the prior accounting literature, hence, care has been exercised in generalizing the findings. Practical implications This study has direct implications for a number of stakeholders, including standard setters, policymakers, securities regulators, researchers, investors, financial statement preparers and auditors. For example, the future development of accounting standards can be supported by the empirical conclusions in this study together with previous standard-setting ambitions, commentaries, experiments and analytical work. Originality/value This study extends prior single-country studies on reporting quality and cross-country studies on transition effects of firms switching from local to International Accounting Standards by observing the impact of accounting standard characteristics on additional measures of reporting quality and accrual as well as real earnings management when holding institutional factors constant. The study also offers archival evidence complementing prior commentaries, experiments and analytical work.

scholarly journals The credibility of earnings announced by new stock companies: accrual and real earnings management

Equilibrium ◽  
2021 ◽  
Vol 16 (3) ◽  
pp. 661-677
Author(s):  
Tomasz Sosnowski
Keyword(s):  
Earnings Management ◽  
Initial Public Offering ◽  
Financial Reporting ◽  
Value Added ◽  
Financial Statements ◽  
Discretionary Accruals ◽  
Cash Flows ◽  
Production Costs ◽  
Real Earnings Management ◽  
The Impact

Research background: An initial public offering (IPO) creates an excellent opportunity to research the impact of changes in the institutional environment of companies on the trustworthiness of the information disclosed in financial statements. Purpose of the article: The main aim of the study is to analyze the use of accrual and real earnings management to inflate earnings, revenue, or total assets around the going public event. Therefore, this paper contributes to the stream of study on the quality of financial reporting of new stock companies. Methods: Two main approaches reflect the use of various types of earnings management activities, i.e., discretionary accruals and real earnings management. In both cases, it was necessary to use proper OLS method estimated models to identify the normal level of categories that affect the results reported in financial statements. Findings & value added: Based on a sample of 183 IPOs from the Warsaw Stock Exchange between 2005 and 2015, generally, managers of newly-listed companies actively use discretionary accruals, reduce production costs and certain discretionary expenses, and abnormal cash flows from operations ? i.e., all proxies of earnings management used in the paper ? in the periods around the IPO. In the period prior to the IPO, managers more often introduce techniques typical of the real sphere of the company's operations, in particular, the deliberate modeling of certain discretionary costs. In turn, the use of discretionary accruals dominates in the year after the IPO.

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.

scholarly journals Venture Capital and Financial Reporting in Newly Public Firms

2018 ◽  
pp. 411-429
Author(s):  
Lars Helge Hass ◽  
Monika Tarsalewska
Keyword(s):  
Earnings Management ◽  
Empirical Evidence ◽  
Financial Reporting ◽  
Reporting Quality ◽  
Active Role ◽  
Real Earnings Management ◽  
Venture Capitalists ◽  
Public Firms ◽  
Reporting Practices

Financial intermediaries such as venture capitalists (VCs) not only provide financing, they also play an active role in firm governance and in financial practices before a firm goes public. Venture capitalists are actively engaged in monitoring and advising their portfolio firms. Thus, one also expects them to exert significant influence over the development of financial reporting practices. This chapter reviews recent literature and empirical evidence on VCs and financial reporting quality in newly public firms. It surveys the role of VCs in such activities as earnings management. In particular, it discusses how their monitoring activities and reputation can impact how their portfolio firms establish financial reporting practices. Subsequently, it also reviews the consequences of misreporting, and whether they affect VC behavior ex ante. Finally, the chapter uses recent data to provide empirical evidence on the effect of VCs on accrual and real earnings management.

scholarly journals Internal Governance and Real Earnings Management

2015 ◽  
Vol 91 (4) ◽  
pp. 1051-1085 ◽  
Author(s):  
Qiang Cheng ◽  
Jimmy Lee ◽  
Terry Shevlin
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Reporting Quality ◽  
Team Work ◽  
Real Earnings Management ◽  
Cross Sectional ◽  
Internal Governance ◽  
Checks And Balances ◽  
Earnings Benchmarks ◽  
Alternative Measures

ABSTRACT We examine whether internal governance affects the extent of real earnings management in U.S. corporations. Internal governance refers to the process through which key subordinate executives provide checks and balances in the organization and affect corporate decisions. Using the number of years to retirement to capture key subordinate executives' horizon incentives and using their compensation relative to CEO compensation to capture their influence within the firm, we find that the extent of real earnings management decreases with key subordinate executives' horizon and influence. The results are robust to alternative measures of internal governance and to various approaches used to address potential endogeneity, including a difference-in-differences approach. In cross-sectional analyses, we find that the effect of internal governance is stronger for firms with more complex operations where key subordinate executives' contribution is higher, is enhanced when CEOs are less powerful, is weaker when the capital markets benefit of meeting or beating earnings benchmarks is higher, and is stronger in the post-SOX period. This paper contributes to the literature by examining how internal governance affects the extent of real earnings management and by shedding light on how the members of the management team work together in shaping financial reporting quality. JEL Classifications: G32; M40.

scholarly journals Determinan Praktik Manajemen Laba Riil

2018 ◽  
Vol 14 (2) ◽  
pp. 110-120
Author(s):  
Koerniawan Dwi Wibawa ◽  
Bambang Subroto ◽  
Wuryan Andyani
Keyword(s):  
Earnings Management ◽  
Cash Flow ◽  
Management Practices ◽  
Audit Quality ◽  
Cash Flows ◽  
Negative Influence ◽  
Positive Influence ◽  
Production Costs ◽  
Real Earnings Management ◽  
Financial Disclosure

The aim of this study was to examine the effect of the level financial statement disclosure on earnings management and audit quality in moderating this study. The sample of this study was from LQ45 companies, especially in manufacturing as many as 9 companies with an observation period of 5 years (2012-2016). This study provided empirical evidence that a negative influence between the level of disclosure of financial statements and real earnings management used production costs. But with the proxies of operational cash flow and discretionary costs produce provided a positive relationship. The results of the moderation regression test with production costs as proxy of earnings management provided that audit quality can strengthen the negative effect of the financial disclosure level on earnings management. Other results indicate that audit quality can strengthen the positive influence of the financial disclosure level on earnings management with a proxy for operational cash flows and discretionary costs. The Managerial implications of research was that auditors can examine other factors besides operational cash flow and discretionary costs in carrying out judgment on earnings management practices in the company.  

Audit committee and financial reporting quality: the moderating effect of audit quality

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Sana Mardessi
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Audit Quality ◽  
Reporting Quality ◽  
Moderating Effect ◽  
Real Earnings Management ◽  
Financial Reporting Quality ◽  
Content Type ◽  
The Relationship

Purpose The purpose of this study is to address the impact of audit quality on financial reporting quality proxied by real earnings management. To further clarify the mentioned links, this study empirically assesses the moderating effect of audit quality. Design/methodology/approach The study is based on a sample consisting of 90 non-financial companies that are listed in the Amsterdam stock exchange in AEX all share index over the 2010–2017 period. This study applies a quantitative approach and secondary data as the main source of information for analysis. This paper performs an ordinary least squares regression to examine the moderating effect of audit quality on the relationship between financial reporting quality. Findings Empirical findings demonstrate that corporate governance mechanism, mainly independence members, financial expert and audit committee size has a statistically significant relationship with real earnings management. However, the effect of audit committee meetings on real earnings management is not significant. There is also evidence that audit quality moderates the audit committee – real earnings management links. Originality/value This study extends the existing literature by examining the moderating effect of audit quality on the relationship between financial reporting quality proxied by real earnings management in the Dutch context.

Accrual-based and real earnings management before and after IFRS adoption

2016 ◽  
Vol 17 (1) ◽  
pp. 2-23 ◽  
Author(s):  
Aikaterini C. Ferentinou ◽  
Seraina C. Anagnostopoulou
Keyword(s):  
Earnings Management ◽  
Cash Flows ◽  
Unintended Consequences ◽  
Production Costs ◽  
Real Earnings Management ◽  
Significant Shift ◽  
Accounting Quality ◽  
Content Type ◽  
Ifrs Adoption ◽  
Before And After

Purpose – The purpose of this study is to examine the use of accrual-based vs real earnings management (EM) 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 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 – The authors 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.

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