Overvaluation and the Choice of Alternative Earnings Management Mechanisms

Abstract

In this study I examine how the degree and duration of overvaluation affect management's use of alternative within-GAAP earnings management, restrictions on further exploitation of within-GAAP accruals management, and subsequent non-GAAP earnings management. Further, I examine how one type of earnings management segues into another type as overvaluation persists. I present evidence that the longer the firm is overvalued, the greater is the amount of total earnings management. I also find that managers engage in accruals management in the early stages of overvaluation before moving to real transactions management, in order to sustain their overvalued equity. Finally, I find that the longer a firm is overvalued, the more likely it is to engage in one of the most egregious forms of earnings management, non-GAAP earnings management. Collectively, the results suggest that the duration of firm overvaluation is an important determinant of managements' choice of alternative earnings management mechanisms. JEL Classifications: M41, M43, M44. Data Availability: Data are available from sources identified in the text.

Analyst Coverage and Earnings Management Using Classification Shifting

“…In the same vein, Chi et al (2011) provide evidence that firms are more likely to engage in real earnings management when audited by higher quality auditors since their ability to manipulate accruals is constrained. Badertscher (2011) examines a sample of overvalued firms and finds that during the period of overvaluation firms use accrual-based earnings management at the beginning and then move into real earnings management to sustain their overvalued equity as they run out of accruals management choices. Cohen and Zarowin (2010) find that around the time of seasoned equity offerings (SEOs), firms choose to engage in real earnings management based on their ability and costs to do accruals management.…”

Trade-Off Antara Manajemen Laba Akrual Dan Riil Pada Bank Konvensional Publik Di Indonesia

“…Terdapat dua teknik manajemen laba yang dapat dilakukan oleh manajer, yaitu dengan cara akrual dan riil (Cohen dan Zarowin 2010;Badertscher 2011;Downing 2012;Zang 2012). Manajemen laba akrual tidak memiliki dampak langsung terhadap arus kas perusahaan, tetapi meningkatkan risiko terdeteksinya akrual oleh auditor mau-pun regulator, contohnya mengubah metode depresiasi aset tetap, allowance for loan losses, loan charges off, dan pensions settlement gains (Beatty et al 1995;Beaver dan Engel 1996;Zang 2012;Scott 2015).…”

Re-Examining Real Earnings Management to Avoid Losses

“…Wongsunwai (2013) investigates the impact of venture (VC) capitalist quality on earnings management in companies conducting initial public offerings (IPOs), and finds that IPO firms backed by higher-quality VCs exhibit less aggressive financial reporting including lower real activities manipulation. Badertscher (2011) examines how the degree and duration of overvaluation affect management's use of alternative earnings management tools, and shows that managers engage in accruals earnings management in the early stages of overvaluation before moving to real earnings management in order to sustain their overvalued equity.…”