Betting against real earnings management

Bansal, Manish; Ali, Asgar

doi:10.1108/ara-05-2021-0091

Cited by 8 publications

(3 citation statements)

References 75 publications

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“…Based on seminal studies, the overarching principle of REM is that to achieve short-term financial targets, firms manipulate earnings in the current period, but this is not sustainable (Graham et al ., 2005; Gunny, 2010; Roychowdhury, 2006; Zang, 2011). Countless studies infer that REM is a form of managerial opportunism based on the aforementioned inference (Agustia et al ., 2022; Bansal and Ali, 2022; Barghathi et al ., 2017; Bhatia et al ., 2019; Chapman and Steenburgh, 2011; Chen et al ., 2015; Choi et al ., 2021; Kiattikulwattana, 2014; Kim et al ., 2019; Luo, 2019; Mindzak and Zeng, 2018; Pappas et al ., 2019).…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

An analysis of the positive effect of real earnings management on financial performance

Lim

Mali

2023

ARA

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PurposeREM models infer abnormal levels of cashflow from operations (AbCFO), selling, general and admin (AbSGA) and production expenses (AbProd) are opportunistic, based on the supposition that engaging in real activities to meet current earnings targets (t) will negatively influence future performance (t+1). However, from a firm productivity perspective, cost reduction (via AbCFO, AbProd and AbSGA) is interpreted as an efficiency enhancing business strategy. This study therefore differentiates between (1) firms with ineffective management that have engaged in AbCFO, AbProd and AbSGA to achieve an optimal resource-cost mix to generate sales (REMF) and (2) firms with effective management that have not (OEF).Design/methodology/approachUsing a sample of Korean listed firms over the 2000–2016 sample period, the study utilizes data envelopment analysis to capture the capability of management to generate sales from resources that are directly under their control. The study then compares the incremental effect that managerial decision making can have on real earnings management (REM) and future firm performance (period t+1 to t+5).FindingsThe study makes two important contributions. First, consistent with the efficiency/productivity literature, but contrary to seminal REM studies, empirical results shows that AbCFO, AbProd and AbSGA improve firm performance in period t and t+1 (to t+5), demonstrating “REM” is not opportunistic by default. Second, OEF have higher financial performance compared to REMF, in periods t and t+1.Originality/valueThe study therefore invokes resource-based theory and data envelopment analysis to integrate managerial effectiveness (human capital) into REM modelling. The study therefore extends the basic REM residual model.

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Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

An analysis of the positive effect of real earnings management on financial performance

Lim

Mali

2023

ARA

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“…Many prior studies in Indian institutional settings and other developing nations have suggested that different types of firm characteristics are useful in predicting earnings management (for instance, Adhikari et al ., 2021; Ali and Bansal, 2021; Bashir et al ., 2021; Bansal and Kumar, 2021; Bansal et al ., 2022, Bansal and Ali, 2022; Bansal and Bashir, 2023; Thomas et al ., 2022), hence we include a few variables such as firm size ( Size ), leverage ( Lev ), return on assets ( ROA), operating cash flows ( OCF ) and market to book value ( MTB ). We also include industry-fixed effects in model (2) to control for unobserved heterogeneity within industries.…”

Section: Methodsmentioning

confidence: 99%

One-woman director mandate and earnings quality: role of financial expertise and woman presence on the audit committee

Bansal

2023

ARA

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PurposeThe study examines the impact of a recent mandate (Section 149 of the Indian Companies Act, 2013, where firms of a certain size are mandated to appoint at least one woman director on the board) on the earnings quality of firms. The study also examines the role of financial expertise and the presence of a woman director in the audit committee on the association between mandate and earnings quality.Design/methodology/approachTaking leverage of a quasi-natural experiment in India, the authors employ the ‘Difference-in-Difference’ (DiD) technique. DiD enables the author to filter out the impact of concurrent exogenous shocks while examining the issue. The propensity score matching and entropy balancing techniques have been employed to overcome the problem of endogeneity and self-selection bias.FindingsBased on the sample of 538 Bombay Stock Exchange (BSE) listed firms, the author finds that magnitude of discretionary accruals has decreased among test firms (firms mandated to comply with Section 149) relative to benchmark marks (firms not mandated to comply with Section 149) during the post-legislation period, indicating the improved earning quality after the mandate. This finding is consistent with the notion of social role theory that women are less likely to be engaged in risky activities such as earnings management. Further, the author find that the financial expertise of the woman and presence of the woman on the audit committee strengthen the positive impact of the mandate on earnings quality. These results are robust to alternative measurements of discretionary accruals.Originality/valueThe study is among the pioneering attempts to make use of a quasi-natural experiment and investigate the impact of a woman director on earnings quality. The study is also one of the few studies to focus on a developing country like India having a culture dominated by men.

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“…Hence, to ensure that our results are the outcome of shifting practices, we control for REM and AEM. We use an unexpected level of accruals (A_ACC) to measure AEM, an unexpected level of discretionary expenditure (A_DISX), and an unexpected level of production costs (A_PROD) to measure REM, consistent with many prior studies (for instance, Bansal and Ali, 2022;Bansal and Kumar, 2021). We control for certain cross-sectional characteristics.…”

Section: Control Variablesmentioning

confidence: 99%

Do shifting practices vary across the firm life cycle?

Bansal

2022

Australian Journal of Management

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Prior research documents that managers engage in revenue shifting and expense shifting to report inflated operating performance of firms. This study extends this research in a new direction by investigating the relationship between revenue shifting and expense shifting across the firm life cycle. The study posits and finds that firms during the low life cycle stages (particularly, introductory and growth stage) prefer expense shifting over revenue shifting, whereas firms during the high life cycle stages (particularly, mature and decline stage) prefer revenue shifting over expense shifting for managing earnings, implying that firms choose the shifting tool based on ease, need, and relative advantage of each tool. Our subsequent tests suggest that the effect of expense (revenue) shifting is more pronounced among low (high) life cycle stage firms when they are small (large) and young (old). These results are robust to control for other tools of earnings management, and alternative measures of shifting practices and firm life cycle. The findings aware auditors and analysts of the shifting practices of firms operating at high and low life cycle stages. JEL Classification: M41, M48

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Betting against real earnings management

Cited by 8 publications

References 75 publications

An analysis of the positive effect of real earnings management on financial performance

An analysis of the positive effect of real earnings management on financial performance

One-woman director mandate and earnings quality: role of financial expertise and woman presence on the audit committee

Do shifting practices vary across the firm life cycle?

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