How Does Culture Impinge Upon Managers’ Demeanor of Earnings Management? Evidence from Cross-Country Analysis

We examine the impact of national culture on earnings. Specifically, we examine managers’ likelihood of using accrual or real earnings management (REM) and the role of culture on various attributes of earnings (accruals quality, persistence, smoothing, and predictability). We measure national culture using Hofstede’s six dimensions of culture (1984, 2001, 2010). Using data from 36 countries during 1997–2018, we find that managers are likely to use both accruals and REM in high power distance (PDI) countries. In long-term-oriented countries, managers are more likely to use REM. In uncertainty avoidance (UAI) countries, in high individualist countries, and in higher indulgent versus restraint countries, managers are less likely to use either type of earnings management. In masculine countries, managers tend to use lower accruals management and rely on production cost REM. We also find the use of accruals management and the use of REM are substitutes for each other. In addition, we are able to classify countries into four earnings quality groups based on the culture impact on the earnings attributes (primarily driven by accruals quality, predictability, and smoothing). Persistence is generally not significant in classifying countries by earnings attributes. Our findings indicate that a universal set of accounting standards is a challenging goal to achieve given the cultural diversity across countries. To improve the existing corporate governance framework and to ensure high quality and uniform financial statements, the enforcement of standards should be tailored to specific cultures, or at a minimum, corporate boards need to be more culturally diversified.

Accruals Management to Avoid The Current Ratio Falling Below One: An Empirical Analysis Among Nonprofits

This study examines the distribution of the current ratio among large Belgian nonprofit organizations (NPOs). A current ratio falling below one signals (potential) liquidity problems among different types of stakeholders. Consistent with managerial intervention to avoid the current ratio falling below one, we observe significantly more (fewer) observations meeting or just exceeding (falling below) the threshold of one than would normally be expected. This discontinuity around one disappears when considering the distribution of the “pre-managed” current ratio (i.e., the current ratio corrected for abnormal working capital accruals). The latter observation is consistent with managerial intervention in the financial reporting process to avoid the current ratio falling below one. The aforementioned findings are supported by a multivariate regression model revealing significantly higher abnormal working capital accruals for observations having a current ratio equaling or exceeding one, but a pre-managed current ratio falling below one.

Earnings management to avoid earnings boosts

PurposeThe purpose of this study is to investigate whether earnings boosts before the year end trigger earnings management. It examines whether firms that substantially outperformed their last year earnings during the first three quarters push their earnings down to avoid reporting earnings boosts.Design/methodology/approachRegression analysis is used to compare earnings management of firms with earnings boosts and other firms.FindingsThe results indicate that firms outperforming their last year results by the end of the third quarter manipulate their earnings downwards by means of real activities manipulation, while they do not indicate income-decreasing accruals management. It is also found that consistent with the prominent shift from accruals management to real activities manipulation, accruals management is less costly which justifies why it is used for downward manipulation.Research limitations/implicationsThe results are limited to one single earnings benchmark i.e. last year earnings. Further research may individually or collectively examine other benchmarks including analysts' forecasts.Practical implicationsThe findings suggest that users should be more vigilant of firms exceeding their last year interim results, as they could be involved in downward earnings management.Originality/valueThis study documents earnings management in a new setting where earnings boosts before the year end trigger downward manipulation of real activities.

Can compensation committees effectively mitigate the CEO horizon problem? The role of co-opted directors

Purpose This study aims to examine whether compensation committees dominated by co-opted directors are less effective in mitigating the CEO horizon problem. Design/methodology/approach The author uses a sample of 7,280 firm-year observations from 1998 to 2011. Findings In this study, the author finds evidence of opportunistic research and development (R&D) reduction and accruals management in firms with retiring CEOs and compensation committees dominated by co-opted directors. Moreover, it is found that R&D reduction and income-increasing accruals are less discouraged when determining the compensation for retiring CEOs by compensation committees that are dominated by co-opted directors. The results suggest that compensation committees dominated by co-opted directors are less effective in adjusting CEO compensation to mitigate the CEO horizon problem. Originality/value The study reveals that co-opted directors are weak monitors. Moreover, the study adds empirical evidence to the debate of organizations’ CEO horizon problem. Finally, the study adds to the literature on corporate governance, revealing that compensation committees play an important role in mitigating an organization’s CEO horizon problem by adjusting CEO compensation.

Target Firm Earnings Management, Acquisition Premium, and Shareholder Gains

Using a sample of U.S. domestic deals from 1990 to 2016, we find that bidders adjust the amount of premium paid in mergers and acquisitions (M&As) based on the levels of earnings management at target firms. However, the way a firm manipulates earnings upward matters: earnings management via real activities manipulation is more detrimental than discretionary accruals. As a result, target firms that engage in real earnings management receive lower premiums in M&As, while accruals management has no effect on premiums. Correspondingly, we find that the targets’ M&A announcement-period cumulative abnormal returns are inversely related to their level of real earnings management, while the returns are not related to accruals management. Further analyses confirm that target shareholders’ wealth is not only driven by undervaluation, expected synergy, and managerial hubris, but also reflects bidders’ perception of the target firms’ earnings quality based on real earnings management.

Effects of experience years, gender of auditors and audit firm size on firm’ discretionary accrual management: Evidence from Vietnam

The objective of this study is to examine the effects of audit firm size and auditor characteristics on firms’discretionary accruals management of companies listed on Ho Chi Minh Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX). The results show that the gender of auditors affect discretionary accruals (DA). Female auditors approve DA at a lower value than male auditors. Number of experience years of auditors also affects restriction of DA. When the number of experience years of auditors increases, the magnitude of DA decreases, which means the quality of information on financial statements (FS) is higher. This study also reveals that the magnitude of DA is significantly lower amongst companies engaging a Big-4 specialist audit firm relative to companies using the audit services of a Non‐Big-4 specialist.

Does peer firm executive compensation affect earnings management?

Purpose The purpose of this paper is to examine the relation between executive compensation of peer firms and earnings management. Given the prevalence of the competitive benchmarking practice in executive compensation, chief executive officer (CEO) compensation of potential peer firms can influence the behavior of CEOs at their current firms. Design/methodology/approach This paper employs an ordinary least squares regression model to test whether CEO compensation of other firms in similar product markets is associated with a firm’s accruals management. It also employs firm fixed effects regressions to control for time invariant omitted variables. Lastly, it conducts subsample analyses based on CEO duality and the passage of Sarbanes-Oxley Act (SOX) and a propensity score matching analysis. Findings Using time-varying industry classifications based on product similarity, the author finds that CEO compensation of other firms in similar product markets is positively associated with a firm’s accruals management. The relation is more pronounced for firms with CEO duality, while it is less pronounced in the period after the passage of SOX. The main findings are robust to the use of firm fixed effects regressions, a propensity score matching analysis, and an alternative weighting scheme. Originality/value This paper contributes to the literature on executive compensation and earnings management. It provides useful insight into the spillover effect of other firms’ executive compensation on earnings management.