Earnings management through real activities manipulation

Roychowdhury, Sugata

doi:10.1016/j.jacceco.2006.01.002

Cited by 3,929 publications

(4,328 citation statements)

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“…The key difference between the two is that real earnings management involves real economic actions (e.g., influencing current and/or future cash flows) to manipulate earnings, while accruals-based earnings management uses only accounting accruals to influence reported earnings (e.g., no impact on cash flows; Cohen & Zarowin, 2010;Roychowdhury, 2006). Roychowdhury (2006) identified three metrics of real earnings management: overproduction, abnormal cash flows from operations, and discretionary expenses. We will discuss the accrual-based earnings management and the three metrics of real earnings management in details later.…”

Section: The Measures Of Earnings Managementmentioning

confidence: 99%

Earnings Management, Politically Connected CEOs, and Politically Connected Independent Board Members: Evidence from China

Hong¹

2017

ijafr

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This study investigates whether Chinese firms' earnings management behaviors vary systematically with politically connected CEOs and studies the association between Chinese firms' earnings management behaviors and the presence of politically connected independent board members. We find that firms with politically connected CEOs engage in less real earnings management, probably because their political connections make raising capital easier and reduce incentives for earnings management. However, this relationship is weaker in State-Owned Enterprises (SOEs) than in non-SOEs. In addition, we find that politically connected independent board members have significant negative impacts on real earnings management in non-SOEs, suggesting the independent directors with political ties could mitigate real earnings management.

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Section: The Measures Of Earnings Managementmentioning

confidence: 99%

Earnings Management, Politically Connected CEOs, and Politically Connected Independent Board Members: Evidence from China

Hong¹

2017

ijafr

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“…Third, Roychowdhury (2006) suggests that price discounts, channel stuffing, and overproduction all demonstrate negative effects on contemporaneous abnormal OCF, while reduction of discretionary expenditures brings out a positive effect. Thus, the net effect on abnormal OCF is difficult to estimate.…”

Section: The Measurement Of Abnormal and Normal Operating Cash Flowmentioning

confidence: 96%

“…Indeed, managers have incentives to manipulate real activities during a year to meet certain earnings targets (Zang, 2012). In the surveys conducted by Dechow et al (2010), Roychowdhury (2006), Bruns and Merchant (1990) and Graham et al (2005), financial executives express a greater willingness to manipulate earnings through real activities than accruals. With the primary objective of meeting certain earnings thresholds, managers may undertake real activities management actions that deviate from normal business practices.…”

Section: The Measurement Of Abnormal and Normal Operating Cash Flowmentioning

confidence: 99%

“…Second, Roychowdhury (2006) defines real activities manipulation as management actions that departures from normal operational practices. These departures do not necessarily contribute to firm value even though they enable managers to meet reporting goals."…”

Section: The Measurement Of Abnormal and Normal Operating Cash Flowmentioning

confidence: 99%

“…Nondiscretionary income is the sum of operating cash flows and nondiscretionary accruals. Abnormal cash flow from real activities manipulation is according to Roychowdhury's (2006) model. All variables of earnings components are deflated by totals at the beginning of the period.…”

Section: Appendixmentioning

confidence: 99%

See 2 more Smart Citations

Is Earnings Information Superior to Net Income as a Measure of Future Earnings? A Study on Accruals and Real Earnings Management

Lee¹,

Lu²

2014

International Journal of Financial Research

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This study examines the incremental information content of components of earnings by regressing future net income of earnings' components in a series of multivariate models. We find that the components of operating cash flow and accruals provide more information to effectively predict future profitability, particularly when we dismantles financial measurements into various combinations of operating cash flow and accrual-based components. However, the components of real earnings management provide less information of future profitability. We observe that the more informative the information content of earnings is, the more precise the prediction of future profitability can be.

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R&D and Intangibles

Sougiannis

2015

Wiley Encyclopedia of Management

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Empirical studies have established that corporate intangibles assets such as Research and Development (R&D), employee satisfaction, firm reputation and celebrity status, are valued by market participants. R&D expenditures lead to higher future profitability and stock market investors price them positively. These investments do not appear to be superior since the average stock returns of R&D and non‐R&D firms are comparable. However, portfolios of high R&D intensity and of large unexpected increases in R&D earn positive future abnormal returns. This has sparked an ongoing debate as to whether the abnormal returns represent investor mispricing or compensation for risk. Since R&D spending is treated as a period expense in the financial reports, the potential mispricing has also been attributed to the limited disclosures and accounting practiced. Financial analysts appear to play an important role in compensating for R&D‐related financial reporting deficiencies but the compensation is far from complete. Successful R&D activity leads to patents which have also been shown to be positively associated with stock market values and future earnings. However, results show that neither analysts nor investors appear to fully understand the implications of patent information. Overall, there is a need for continued effort by policy makers to address intangibles‐related information deficiencies.

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Earnings management through real activities manipulation

Cited by 3,929 publications

References 40 publications

Earnings Management, Politically Connected CEOs, and Politically Connected Independent Board Members: Evidence from China

Earnings Management, Politically Connected CEOs, and Politically Connected Independent Board Members: Evidence from China

Is Earnings Information Superior to Net Income as a Measure of Future Earnings? A Study on Accruals and Real Earnings Management

R&D and Intangibles

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