Earnings management to avoid earnings boosts

Makarem, Naser; Roberts, Clare

doi:10.1108/jaar-01-2019-0012

Cited by 7 publications

(3 citation statements)

References 74 publications

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“…Hence, to ensure that our results are due to revenue misclassification, we control for AEM, REM and expense shifting in the model (3). Following prior studies (for instance, Makarem and Roberts, 2020; Zang, 2012), we measure REM through abnormal discretionary expenditure ( A_DISX ) and abnormal production costs ( A_PROD ). Following prior studies (for instance, Bansal and Ali, 2021; Bansal and Kumar, 2021), we measure AEM through abnormal accruals ( A_ACC ), where A_ACC is estimated through the performance-adjusted modified Jones model (Kothari et al , 2005).…”

Section: Methodsmentioning

confidence: 99%

Impact of corporate life cycle on misclassification practices: evidence from IFRS adoption in India

Bansal

2021

JAAR

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PurposeThe study aims to examine the impact of the firm life cycle on the misclassification practices of Indian firms. The study also examines the impact of International Financial Reporting Standards (IFRS) on the misclassification practices of Indian firms.Design/methodology/approachThe study uses Dickinson (2011) cash flow patterns to classify firm-years under life cycle stages. Two forms of misclassification, namely revenue misclassification and expense misclassification have been examined in this study.FindingsBased on a sample of 19,268 Bombay Stock Exchange (BSE) firm-years spanning over ten years from March 2010 to March 2019, results show that firms operating at high (low) life cycle stage are more likely to be engaged in revenue (expense) misclassification, implying that firms substitute between the classification shifting tools depending upon ease and needs of each tool. Further, our results demonstrate that the magnitude of expense shifting has been significantly increased among test firms (firms reporting under IFRS) relative to benchmark firms (firms reporting under domestic GAAP) in the post-IFRS adoption period, implying that adoption of IFRS negatively affects the accounting quality of Indian firms.Research limitations/implicationsThe study considers only two main forms of misclassification, namely revenue and expense misclassification. However, future research may explore the cash flow misclassification.Practical implicationsThe findings suggest that standard-setting authorities make more mandatory disclosure requirements under IFRS to curb the corporate misfeasance of classification shifting.Originality/valueFirst, the study is among the earlier attempts to examine the impact of the firm life cycle on misclassification practices. Second, the study explores the unique Indian institutional settings concerning the phased-manner implementation of IFRS and examines its impact on the classification shifting practices of firms.

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Section: Methodsmentioning

confidence: 99%

Impact of corporate life cycle on misclassification practices: evidence from IFRS adoption in India

Bansal

2021

JAAR

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“…We end our sample period in 2018 as there is evidence that Brexit uncertainty started to decline after 2018 (Bloom et al 2019a, b). Consistent with prior earnings management studies (e.g., Roychowdhury 2006;Xu 2016;Makarem and Roberts 2020), we exclude firms operating in regulated industries (SIC codes 4400-4999), and banks and financial institutions (SIC codes 6000-6499). Measures of earnings manipulation are run cross-sectionally for every year and industry.…”

Section: Datamentioning

confidence: 99%

Policy uncertainty and real activities manipulation: evidence from Brexit

Makarem,

Singh,

Sultana

et al. 2023

Rev Quant Finan Acc

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Brexit exposed the UK to substantial policy uncertainty that could affect the performance and behavior of British firms. We examine the impact of Brexit as an exogenous shock to policy uncertainty on real activities manipulation by British firms. Using several measures of real activities manipulation and a difference-in-differences design, we compare the earnings management of firms most adversely affected by Brexit uncertainty (affected firms) to other firms. Our results indicate that the affected firms exhibit higher real activities manipulation after the Brexit vote and we also find that they demonstrate similarly higher accruals management. Our findings suggesting that policy uncertainty induces the costly practice of real activities manipulation are relevant to various stakeholders including policymakers and financial statements users.

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“…Chanchani and MacGregor (1999) reviewed the literature that examined Gray's postulations and found consistent support for a direct relationship between aspects of accounting and uncertainty avoidance. More recently, both Nabar and Boonlert-U-Thai (2007) and Doupnik (2008) found that uncertainty avoidance is significantly related to earnings management; Makarem and Roberts (2020) and Makarem et al (2018) emphasize that earnings management is a critical subject in accounting. Daniel et al (2012), using GLOBE variables, found a positive relationship between uncertainty avoidance and corporate governance practices.…”

Section: Operationalization Of Constructsmentioning

confidence: 99%

National culture and public-sector budgeting: the mediating role of country-level institutions using a structural equation modeling approach

Zarei

Yazdifar

Ghaleno³

et al. 2021

JAAR

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PurposeDespite cultural dimensions being included in hundreds of business and management research studies, there have been relatively few studies in public-sector accounting that include the use of cultural dimensions. It is posited that national cultural variables impact the institutions, which, in turn, have an influence on public-sector budgeting. The study aims to contribute to the literature by examining these relations in 31 countries.Design/methodology/approachThese relationships are empirically evaluated by structural equation modeling using measures of national culture from Global Leadership and Organizational Behavior Effectiveness (GLOBE) study and Worldwide Governance Indicators (WGIs) measures named institutions from the World Bank. Furthermore, measures of public-sector budgeting are evaluated in which public-sector budgeting is classified according to the legislative power of the purse and budget transparency.FindingsGenerally, findings reveal that institutions mediate the relationship among national cultural variables and budgeting at the national level. By that means, budgeting in a given nation is linked to the nation's supporting institutions which, in turn, are influenced by the national culture of those who maintain them. Particularly, power distance and uncertainty avoidance impact budgeting through the full mediation of institutions.Research limitations/implicationsThe World Bank's database used for the institutions contained over 200 countries (Kaufmann et al., 2007); the GLOBE cultural database (House et al., 2004) contained data for 62 societies; the public-sector budgeting (Qi and Mensah, 2011) included power of the purse and budgeting transparency country scores for 49 countries and the datasets comprised 31 nations, mostly from Organisation for Economic Co-operation and Development (OECD) countries. While smaller than we would have preferred, the size is consistent with other international studies (for instance: Waldman et al., 2006; Kwok and Tadesse, 2006).Practical implicationsThe findings of the paper suggest that any plan to improve a nation's budgeting should consider the links between budgeting, supporting institutions and the culture of those that run them. The formal adoption of new methods and standards by supporting institutions may not be enough without accompanying efforts to transform national culture.Originality/valueThe theoretical contribution of the paper is discussed further in the paper.

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Earnings management to avoid earnings boosts

Cited by 7 publications

References 74 publications

Impact of corporate life cycle on misclassification practices: evidence from IFRS adoption in India

Impact of corporate life cycle on misclassification practices: evidence from IFRS adoption in India

Policy uncertainty and real activities manipulation: evidence from Brexit

National culture and public-sector budgeting: the mediating role of country-level institutions using a structural equation modeling approach

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