Re-Examining Real Earnings Management to Avoid Losses

Siriviriyakul, Subprasiri

doi:10.2139/ssrn.2359813

Cited by 14 publications

(14 citation statements)

References 18 publications

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“…He selects an interval on the immediate right of zero as the most likely to contain firms engaged in earnings management than other firms providing evidence that they manipulate sales, production and expenses to avoid reporting a loss. While Roychowdhury (2006) focuses on earnings management by small profit firms, Siriviriyakul (2013) compares real activities manipulation of small-profit and small-loss firms and finds no difference between them.…”

Section: Background and Hypothesis Developmentmentioning

confidence: 99%

Earnings management in the aftermath of the zero-earnings discontinuity disappearance

Makarem

Hussainey

Zalata

2018

JAAR

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Purpose The purpose of this paper is to investigate earnings management by firms reporting a small profit or a small loss after the recent evidence that the discontinuity around zero earnings has disappeared. Design/methodology/approach Using a large sample of US firms for the period 2002–2011, regression analysis and earnings distribution approach are employed to examine the earnings management of small-profit and small-loss firms in terms of both accruals management and real activities manipulation. Findings The results suggest that both small-profit and small-loss firms are engaged in upward manipulation of accruals and real activities. This implies that failure to document a difference between firms to the right and left of zero by prior studies is not due to small-profit firms not managing earnings, but rather this is more attributable to loss firms engaging in upward manipulation. Furthermore, it is indicated that the discontinuity around the distribution of earnings change has also recently disappeared as firms reporting a small earnings decrease demonstrate similar earnings management behaviour to those reporting a small earnings increase. Research limitations/implications This study is subject to the measurement error which is a common limitation in the earnings management literature. Practical implications The results suggest that the users should be aware that, in addition to firms that meet benchmarks by a slight margin, firms narrowly missing benchmarks are also involved in earnings management. Originality/value This study shows that the disappearance of the discontinuity around zero earnings and zero change in earnings should not be interpreted as a sign of no earnings management. It also explains how earnings management could have contributed to the disappearance of the discontinuities in earnings distribution.

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Section: Background and Hypothesis Developmentmentioning

confidence: 99%

Earnings management in the aftermath of the zero-earnings discontinuity disappearance

Makarem

Hussainey

Zalata

2018

JAAR

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“…Our study mainly uses cross-sectional regression analyses. Siriviriyakul (2013) argues that model-predicted EM proxies are likely to have systematic biases; Cohen, Pandit, Wasley, and Zach (2013) suggest that performance matching reduces the degree of misspecification in REM proxies. Therefore, for robustness purposes, we also implement propensity matching in our analyses of the three events.…”

Section: Introductionmentioning

confidence: 99%

Evidence for the Existence of Downward Real-Activity Earnings Management

Francis

Hasan

2015

Journal of Accounting, Auditing & Finance

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Prior studies of real-activity earnings management (REM) focus on earnings-inflating abnormal activities. We seek to establish the existence of downward REM by investigating several corporate events in which managers have incentives to temporarily deflate market valuations. Specifically, we focus on, and find downward REM before, share repurchases, management buyouts (MBOs), and CEO option awards. Large-sample evidence of downward REM is also found in our general analysis of earnings smoothing. Downward REM becomes much smaller or nonexistent when there is a lack of managerial incentives in those events, such as non-carry-through repurchases, incomplete MBOs, and unexpected option awards. Following the research design of Zang, we find that various REM and accrual-based earnings management (AEM) cost factors consistently influence the magnitude of downward REM and AEM around the three corporate events.

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“…The advantage of using random effects is that it takes individual effects into account, captured by the interception of each company. This should provide a better approximation to the error term for each company, than the estimates for sectors used by Roychowdhury (2006), Cardoso (2009), Gunny (2010) and Zang (2012), considered insufficient in dealing with the problem of high performing companies within the same sector (Siriviriyakul, 2013). As can be seen in Figure 1, there is a greater concentration of information on the positive side, suggesting that, between 2008 and 2013, Brazilian companies listed on the BM&FBOVESPA more often reported positive profit margins.…”

Section: Econometric Models For Testing the Paper's Hypothesesmentioning

confidence: 99%

“…Despite these contributions, the statistical models used in this study, as well as in other, particularly international literature, still need to be refined in order to improve the earnings management via operating decisions proxies (Siriviriyakul, 2013).…”

Section: Final Conclusionmentioning

confidence: 99%

Evitar Divulgar Perdas: Um Estudo Empírico do Gerenciamento de Resultados por Meio de Decisões Operacionais

Reis

Lamounier

Bressan

2015

Rev. contab. finanç.

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The aim of this paper is to verify whether Brazilian companies listed on the BM&FBOVESPA used earnings management via operating decisions, when faced with reporting unfavourable results, in order to avoid disclosing losses. Using panel data covering years from 2008 to 2013 in estimated regression models, the paper focuses on three ways of manipulating financial results through operational decisions: by manipulating sales; by reducing selling, general and administrative expenses (SG&A); and by increasing production to report lower costs of goods sold. The results show that the companies did use SG&A to avoid reporting losses, but did not manipulate sales or levels of production for such purposes. The evidence presented suggests that in Brazil managers are only able to manipulate operational activities by reducing operating expenses (SG&A), probably due a lack of flexibility in the production process and the cash flow constraints faced by Brazilian companies. From a users' perspective, this paper finds that companies do use earnings management via operating decisions to avoid disclosing losses to capital markets, which is consistent with the Prospect Theory.

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Re-Examining Real Earnings Management to Avoid Losses

Cited by 14 publications

References 18 publications

Earnings management in the aftermath of the zero-earnings discontinuity disappearance

Earnings management in the aftermath of the zero-earnings discontinuity disappearance

Evidence for the Existence of Downward Real-Activity Earnings Management

Evitar Divulgar Perdas: Um Estudo Empírico do Gerenciamento de Resultados por Meio de Decisões Operacionais

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