Managerial opportunism and real activities manipulation: evidence from option backdating firms

Abstract

Purpose This study aims to examine the use of real activities manipulation by firms implicated in the stock option backdating scandal. Design/methodology/approach The real activity manipulation measures are as follows: abnormal R&D expense, abnormal SG&A expense, abnormal production cost and abnormal cash flow from operations. Using a sample of firms alleged to have backdated options during the period 1998-2006 and non-backdating one-on-one matched firms, a separate regression is run for each of the real activity manipulation measures (dependent variables) on backdating and other variables. Findings The authors report unusually low R&D and unusually low SG&A expenses among the backdating firms. They also find evidence of unusually high production costs among backdating firms compared to the matched firms. Research limitations/implications The findings imply that backdating firms are more aggressive in the use of real activities to manipulate earnings and the use of real activities appears to be opportunistic. Originality/value The study contributes to the literature by providing evidence of the use of real activities manipulation by firms under investigation for fraud. The authors also add to the debate on whether the use of stock options as part of compensation aligns the interest of management with the interest of shareholders.

Do Shariah-compliant Companies Engage Lesser Earnings Management Behaviour?

“…Real activities earnings management is defined as management actions that deviate from normal business practices and are undertaken for purposes of meeting certain earnings i.e., a deviation from companies' normal operational activities (Roychowdhury, 2006). Following recent researchers, this study also uses Roychowdhury's model which comprises four measures to detect real activities earnings management (e.g., Amoah, Anderson, Bonaparte, & Muzorewa, 2017;Hinkel & Hoffman, 2017;Wardhani & Anggraenni, 2017). They are: (i) operating cash flows, (ii) production costs, (iii) expenses, and (iv) combined measures of real activities manipulation (refer Appendix B for details).…”