A Comparative Analysis of Real and Accrual Earnings Management around Initial Public Offerings under Different Regulatory Environments

Alhadab, Mohammad; Clacher, Iain; Keasey, Kevin

doi:10.1111/jbfa.12201

Cited by 40 publications

(43 citation statements)

References 86 publications

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“…Therefore, rated issuers are more motivated to employ accounting and operating discretion to signal firm value. Additionally, our findings are applicable to an international context as the issue of EM is prevalent in international IPOs (e.g., Roosenboom et al., ; Ahmad‐Zaluki et al., ; Alhadab et al., ; Kouwenberg and Thontirawong, 2015; and Alhadab et al., ) and CRAs are globally recognised as a crucial information intermediary and a gatekeeper of the capital markets. The paper also provides important implications for practitioners and regulators in evaluating the financial reporting quality of firms going public with a credit rating.…”

Section: Introductionmentioning

confidence: 64%

“…Research on EM around IPOs mainly analyses managers’ use of accruals in the period of taking their firms public and finds evidence of income‐increasing accrual‐based EM around the IPOs (Aharony et al., ; Friedlan, ; Teoh et al., ; DuCharme, ; DuCharme et al., ; Marquardt and Wiedman, ; Morsfield and Tan, ; and Lee and Masulis, ) . International studies also confirm the aggressive use of accruals by IPO firms in various countries such as the Netherlands (Roosenboom et al., ), the United Kingdom (Alhadab et al., , ), and Asian countries (Ahmad‐Zaluki et al., ; and Kouwenberg and Thontirawong, ). Despite the extensive research on accrual‐based EM around IPOs, evidence on real EM by IPO issuers is less documented.…”

Section: Literature Review and Hypothesesmentioning

confidence: 87%

“…() report that UK IPO firms engage in both accrual‐based and real EM during the offering year in order to overstate earnings. The levels of accrual‐based and sales‐based EM are higher among IPO firms on the lightly regulated UK Alternative Investment Market than among those on the more heavily regulated UK Main Market (Alhadab et al., ).…”

Section: Literature Review and Hypothesesmentioning

confidence: 99%

See 2 more Smart Citations

Credit Ratings and Earnings Management around IPOs

Gounopoulos

Pham

2016

Business Fin & Account

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This study examines the impact of having a credit rating on earnings management (EM) through accruals and real activities manipulation by initial public offering (IPO) firms. We find that firms going public with a credit rating are less likely to engage in income-enhancing accrual-based and real EM in the offering year. The monitoring by a credit rating agency (CRA) and the reduced information asymmetry due to the provision of a credit rating disincentivise rated issuers from managing earnings. We also suggest that the participation of a reputable auditing firm is crucial for CRAs to effectively restrain EM. Moreover, we document that for unrated issuers, at-issue income-increasing EM is not linked to future earnings and is negatively related to post-issue long-run stock performance. However, for rated issuers, at-issue incomeincreasing EM is positively associated with subsequent accounting performance and is unrelated to long-run stock performance following the offering. The evidence indicates that managers in unrated firms generally manipulate earnings to mislead investors, while managers in rated firms tend to exercise their accounting and operating discretion for informative purposes.

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Section: Introductionmentioning

confidence: 64%

Section: Literature Review and Hypothesesmentioning

confidence: 87%

Section: Literature Review and Hypothesesmentioning

confidence: 99%

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Credit Ratings and Earnings Management around IPOs

Gounopoulos

Pham

2016

Business Fin & Account

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“…Following prior research (e.g., Alhadab et al, 2016;Farooqi et al, 2014;Roychowdhury, 2006), three proxies of real earnings management are examined in this study: sales-based manipulations (abnormal cash flows from operations), discretionary expenses-based (abnormal discretionary expenses), and production cost-based (abnormal production cost). Sales-based manipulation aims to increase sales by offering more price discounts and/or more lenient credit terms, but at the expense of cash flows from operations (for more details, see, Roychowdhury, 2006).…”

Section: Measuring Real Activities-based Earnings Managementmentioning

confidence: 99%

Corporate diversification and accrual and real earnings management

Alhadab

Nguyen

2018

RAF

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Purpose-This study aims to examine the non-linear relationship between corporate diversification and real and accrual earnings management, using a sample of 5,659 US firm-year observations for 1,221 firms covering the period from 2001 to 2012. Design/methodology/approach-The authors employ various techniques and regressions to test the hypotheses. Following prior research, several proxies have been used to measure diversification, accrual earnings management, and real earnings management. Findings-The study produces several important findings. First, the study provides evidence that diversified firms engage in real and accrual earnings management to manage their reported earnings upwards. These results are consistent with recent research (e.g., Farooqi et al. 2014; Jirapon et al., 2008) that finds that diversified firms engage in earnings manipulation. Second, and most importantly, the study contributes to the literature by providing the first evidence on a non-linear relationship between corporate diversification and earnings management. Specifically, the study provides evidence that diversified firms engage in accrual (real) earnings management, but this engagement is associated with level of diversification in a non-linear U shaped (inverted U shaped) relationship. Research limitations/implication-Like all other studies, the current study has some limitations. The study was conducted only on the largest firms in the US that have market capitalization of more than $10 million; hence the findings may not be generalizable to small publicly traded firms. Further, the findings may not be generalizable to other markets given the unique characteristics of US markets such as the presence of very sophisticated investors. Practical implications-This study provides some important implications for US regulators to revise their regulations to prevent diversified firms from using earnings management to manipulate reported earnings. Originality/value-This study is the first in the US to examine the non-linear relationship between corporate diversification and earnings management. The study focuses on one of the most active, most attractive, and largest capital markets throughout the world, that of the US. Also, this study is one of the few studies that examine whether diversified firms use real activities manipulation to manage their reported earnings.

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“…Therefore, research question this paper is trying to address is "Is there are possibility to detect earnings management using a shorter time interval?" According to Leggett, Parsons, and Reitenga (2016) real earnings management influences cash flow and operating earnings, whereas accrual earnings management influences predominantly revenues through manipulations with accounts receivable (Dechow, Sloan, & Sweeney, 1995) and the valuation of the company (Alhadab, Clacher, & Keasey, 2016). By further examination of the accounting variables involved in both real and accrual earnings management it is possible to see that the set of these variables is the same as the one used by Altman in calculating corporate liquidity 5 .…”

Section: Analysis Of Past Researchmentioning

confidence: 99%

Estimating the influence of accounting variables change on earnings management detection

Pustylnick

Temchenko

Gubarkov

2017

Journal of International Studies

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Abstract. Standard earnings management detection is performed using two routes:real earnings management (connected with inventory and expenses manipulations) and accrual earnings management (connected with revenue and accounts receivables manipulations). Neither of these two detection algorithms attempts to quantify earnings management and connect it with the infractions committed by the companies, charged by the regulator (in this case -U.S. SEC). In many known cases of revenue manipulation, it is not possible to say whether real or accrual based earnings management was used. In this research, we look at the cases of financial statement fraud, namely one of the most common variations -revenue manipulation, from the perspective of the practitioner and propose the way of detection and quantification of such manipulations. In order to distinguish the cases of earnings management, we use the components of DuPont formula. In addition, we also look at the accounting variables used in the calculation of the detection criterion and determine which ones of them play the main role in revenue manipulations.

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A Comparative Analysis of Real and Accrual Earnings Management around Initial Public Offerings under Different Regulatory Environments

Cited by 40 publications

References 86 publications

Credit Ratings and Earnings Management around IPOs

Credit Ratings and Earnings Management around IPOs

Corporate diversification and accrual and real earnings management

Estimating the influence of accounting variables change on earnings management detection

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