Is there any interaction between real earnings management and accrual-based earnings management?

Abstract

This research aims to investigate whether firms employ real earnings management (REM) and accrual-based earnings management (AEM) as substitutes for each other when managing earnings to meet earnings benchmarks. It specifically looks at the sequential nature of both forms of earnings management. REM is proxied by an abnormal amount of operating cash developed by Dechow et al. (1998), while AEM is proxied by the discretionary accrual model by Dechow, Sloan, & Sweeney (1995). The data was obtained from the Economics and Business Data Center, Faculty of Economics and Business, Gadjah Mada University, focusing on manufacturing and mining companies during the period from 2005 to 2013, which resulted in 754 firm-years data. Using correlation tests and an empirical model developed by this research, which captures the interaction between REM and AEM, this research shows that firms use both forms of earnings management sequentially; managers more often engage in accrual-based earnings management if the earnings produced by real manipulations do not meet the earnings target. This finding is important as REM and AEM occur sequentially instead of simultaneously, and earnings performance is not only driven by accrual-based earnings management but also by real earnings management.

Sustainability Reporting and Earnings Management of Listed Non-Financial Firms in Nigeria

“…The outcome of the study revealed that sustainability reporting has negative effects on both, discretionary accrual and real earnings management. The findings of this study are in agreement with the research conducted by Vogy (2021), which explored the most effective measure of earnings management. According to Vogy (2021), firms use both forms of earnings management in a sequential manner, with managers resorting to accrual-based earnings management more frequently if earnings produced through real manipulations fail to meet the earnings target.…”

“…The findings of this study are in agreement with the research conducted by Vogy (2021), which explored the most effective measure of earnings management. According to Vogy (2021), firms use both forms of earnings management in a sequential manner, with managers resorting to accrual-based earnings management more frequently if earnings produced through real manipulations fail to meet the earnings target. Vogy (2021) further revealed that DAE and REM usually occur sequentially instead of simultaneously.…”

“…Cohen et al (2008) buttressed this in their study which revealed that, when measuring earnings management, concentrating on single method of determining earnings management does not completely explain earnings management activities, they advised that researchers should focus on more than one measure of earnings management so as to arrive to a definite conclusion. Also, most of the studies reviewed in Nigeria, such as the studies by Joshua & Akintoye (2022); Akintoye et al (2021) focus on the listed non-financial firms, but this study will bridge the gap by focusing mostly on the manufacturing firms (that specialize in producing or supplying consumer goods, agricultural products and industrial goods) because, according to Roychowdhury (2006) and Vogy (2021), manufacturing firms offer more inducements to involve in earnings management when compared to other sectors. More so, this study will have practical implications for practitioners, non-financial firms, government and researchers.…”

Earnings Management: Literature Study of Current Development

“…Apart from these two theories, another theory used in research is positive accounting theory (Buanaputra, 2021;PE Setiawan & Dwiana Putra, 2019;Nadhifah & Arif, 2020;Meita, 2019) which explains the theory developed by explaining accounting policies and practice in the company and predict what policies will be chosen by managers under certain conditions in the future. Determination of appropriate accounting policies and practices is important for companies in terms of preparing financial reports.…”

Pengaruh Kecakapan Manajerial Terhadap Manajemen Laba Riil dengan Tata Kelola Perusahaan sebagai Pemoderasi

“…Variabel dependen dalam penelitian ini adalah manajemen laba riil. Manajemen laba riil diukur dengan menggunakan model yang sesuai dengan penelitian sebelumnya (Buanaputra, 2021;Roychowdhury, 2006) = perubahan penjualan bersih perusahaan i pada periode ke-t-1. 𝐴 𝑡−1 = total aset perusahaan i pada periode ke-t-1.…”