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Evidence on the Trade-Off between Real Activities Manipulation and Accrual-Based Earnings Management
TL;DR: The authors study whether managers use real activities manipulation and accrual-based earnings management as substitutes in managing earnings and find that managers trade off the two earnings management methods based on their relative costs.
Abstract: I study whether managers use real activities manipulation and accrual-based earnings management as substitutes in managing earnings. I find that managers trade off the two earnings management methods based on their relative costs and that managers adjust the level of accrual-based earnings management according to the level of real activities manipulation realized. Using an empirical model that incorporates the costs associated with the two earnings management methods and captures managers’ sequential decisions, I document large sample evidence consistent with managers using real activities manipulation and accrual-based earnings management as substitutes.
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TL;DR: In this article, the authors define higher audit quality as greater assurance of high financial reporting quality, and they provide a framework for systematically evaluating their unique strengths and weaknesses, including the role of auditor and client competency in driving audit quality.
Abstract: We define higher audit quality as greater assurance of high financial reporting quality. Researchers use many proxies for audit quality, with little guidance on choosing among them. We provide a framework for systematically evaluating their unique strengths and weaknesses. Because it is inextricably intertwined with financial reporting quality, audit quality also depends on firms’ innate characteristics and financial reporting systems. Our review of the models commonly used to disentangle these constructs suggests the need for better conceptual guidance. Finally, we urge more research on the role of auditor and client competency in driving audit quality.
1,553 citations
TL;DR: In this paper, the authors examine whether socially responsible firms behave differently from other firms in their financial reporting, and they find that firms that exhibit corporate social responsibility also behave in a responsible manner to constrain earnings management, thereby delivering more transparent and reliable financial information to investors.
Abstract: This study examines whether socially responsible firms behave differently from other firms in their financial reporting. Specifically, we question whether firms that exhibit corporate social responsibility (CSR) also behave in a responsible manner to constrain earnings management, thereby delivering more transparent and reliable financial information to investors as compared to firms that do not meet the same social criteria. We find that socially responsible firms are less likely (1) to manage earnings through discretionary accruals, (2) to manipulate real operating activities, and (3) to be the subject of SEC investigations, as evidenced by Accounting and Auditing Enforcement Releases against top executives. Our results are robust to (1) controlling for various incentives for CSR and earnings management, (2) considering various CSR dimensions and components, and (3) using alternative proxies for CSR and accruals quality. To the extent that we control for the potential effects of reputation and financial performance, our findings suggest that ethical concerns are likely to drive managers to produce high-quality financial reports.
1,284 citations
Cites background or methods from "Evidence on the Trade-Off between R..."
...Following Roychowdhury (2006), Cohen et al. (2008), Badertscher (2011), and Zang (2012), we define production costs as PRODt = COGS t + ∆ INVt....
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...Zang (2012) finds that the trade-off between two earnings management methods is a function of their relative costs....
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...…manipulation is particularly important because recent studies (e.g., Roychowdhury 2006; Cohen et al. 2008; Cohen and Zarowin 2010; Badertscher 2011; Zang 2012) suggest that firms use real activities manipulation as an alternative tool for earnings management and trade-off real…...
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...We rely on prior studies (e.g., Roychowdhury 2006; Cohen et al. 2008; Cohen and Zarowin 2010; Badertscher 2011; Zang 2012) to develop our proxies for real activities manipulation....
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...Alternatively, firms can choose between the two mechanisms using the technique that is less costly to them (Cohen et al. 2008; Zang 2012)....
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01 Jan 2012
TL;DR: The influence of institutional investors on myopic R＆D investment behavior was discussed by Bushee as discussed by the authors, who claimed that institutional investors had a profound influence on investment behavior.
Abstract: 机构投资者作为证券市场中的重要力量,越来越受到理论界和实务界的关注。论文对宾夕法尼亚大学沃顿商学院会计学教授布赖恩-布希（Brian Bushee）的论文＂The influence of institutional investors on myopic R＆D investment behavior＂（机构投资者对企业短视研发投资行为的影响,以下简称Bushee（1998））进行评价并提出相关的建议和研究方向。
1,246 citations
TL;DR: This article examined the impact of religion on financial reporting and found that firms in religious areas are less likely to engage in financial reporting irregularities because prior research links religiosity to reduced acceptance of unethical business practices and because managers in religious area are likely to be more averse to litigation risk.
Abstract: This paper examines the impact of religion on financial reporting. We predict that firms in religious areas are less likely to engage in financial reporting irregularities because prior research links religiosity to reduced acceptance of unethical business practices and because managers in religious areas are likely to be more averse to litigation risk. Our results suggest that firms headquartered in areas with strong religious social norms generally experience lower incidences of financial reporting irregularities. We also examine whether religiosity influences managers’ methods of managing earnings. Although we find a negative association between religiosity and abnormal accruals, we find a positive association between religiosity and two measures of real earnings management, suggesting managers in religious areas may prefer real earnings management over accruals manipulation. We provide evidence that our results are not driven by firms headquartered in rural areas and conclude that religious social norms represent a mechanism for reducing costly agency conflicts, particularly when other external monitoring is low.
529 citations
References
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Book•
01 Jan 2001
TL;DR: This is the essential companion to Jeffrey Wooldridge's widely-used graduate text Econometric Analysis of Cross Section and Panel Data (MIT Press, 2001).
Abstract: The second edition of this acclaimed graduate text provides a unified treatment of two methods used in contemporary econometric research, cross section and data panel methods. By focusing on assumptions that can be given behavioral content, the book maintains an appropriate level of rigor while emphasizing intuitive thinking. The analysis covers both linear and nonlinear models, including models with dynamics and/or individual heterogeneity. In addition to general estimation frameworks (particular methods of moments and maximum likelihood), specific linear and nonlinear methods are covered in detail, including probit and logit models and their multivariate, Tobit models, models for count data, censored and missing data schemes, causal (or treatment) effects, and duration analysis. Econometric Analysis of Cross Section and Panel Data was the first graduate econometrics text to focus on microeconomic data structures, allowing assumptions to be separated into population and sampling assumptions. This second edition has been substantially updated and revised. Improvements include a broader class of models for missing data problems; more detailed treatment of cluster problems, an important topic for empirical researchers; expanded discussion of "generalized instrumental variables" (GIV) estimation; new coverage (based on the author's own recent research) of inverse probability weighting; a more complete framework for estimating treatment effects with panel data, and a firmly established link between econometric approaches to nonlinear panel data and the "generalized estimating equation" literature popular in statistics and other fields. New attention is given to explaining when particular econometric methods can be applied; the goal is not only to tell readers what does work, but why certain "obvious" procedures do not. The numerous included exercises, both theoretical and computer-based, allow the reader to extend methods covered in the text and discover new insights.
28,298 citations
TL;DR: In this article, the null hypothesis of no misspecification was used to show that an asymptotically efficient estimator must have zero covariance with its difference from a consistent but asymptonically inefficient estimator, and specification tests for a number of model specifications in econometrics.
Abstract: Using the result that under the null hypothesis of no misspecification an asymptotically efficient estimator must have zero asymptotic covariance with its difference from a consistent but asymptotically inefficient estimator, specification tests are devised for a number of model specifications in econometrics. Local power is calculated for small departures from the null hypothesis. An instrumental variable test as well as tests for a time series cross section model and the simultaneous equation model are presented. An empirical model provides evidence that unobserved individual factors are present which are not orthogonal to the included right-hand-side variable in a common econometric specification of an individual wage equation.
16,198 citations
"Evidence on the Trade-Off between R..." refers methods in this paper
...To test whether this assumption can be applied to managers’ trade-off decisions, I conduct the Hausman test (Hausman 1978) to examine whether the levels of the two earnings management activities behave as endogenous variables that are simultaneously determined....
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TL;DR: In this article, the authors test whether firms that would benefit from import relief attempt to decrease earnings through earnings management during import relief investigations by the United States International Trade Commission (ITC).
Abstract: This study tests whether firms that would benefit from import relief (eg, tariff increases and quota reductions) attempt to decrease earnings through earnings management during import relief investigations by the United States International Trade Commission (ITC) The import relief determination made by the ITC is based on several factors that are specified in the federal trade acts, including the profitability of the industry Explicit use of accounting numbers in import relief regulation provides incentives for managers to manage earnings in order to increase the likelihood of obtaining import relief and/or increase the amount of relief granted While studies of earnings management typically examine situations in which all contracting parties have incentives to "perfectly" monitor (adjust) accounting numbers for such manipulation, import relief investigations provide a specific motive for earnings management that is not
7,362 citations
"Evidence on the Trade-Off between R..." refers methods in this paper
...I estimate the latter using the following modified Jones (1991) model:...
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...I estimate the latter using the following modified Jones (1991) model: ⁄ 1⁄ ∆ ⁄ ⁄ , (3) where is the earnings before extraordinary items and discontinued operations minus the operating cash flows reported in the statement of cash flows in year t (see Collins and Hribar 1999);10 and is the gross…...
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TL;DR: In this paper, the authors show that standard errors of more than 3.0% per year are typical for both the CAPM and the three-factor model of Fama and French (1993), and these large standard errors are the result of uncertainty about true factor risk premiums and imprecise estimates of the loadings of industries on the risk factors.
6,064 citations
"Evidence on the Trade-Off between R..." refers background in this paper
...(1) is estimated cross-sectionally for each industry-year with at least 15 observations, where industry is defined following Fama and French (1997),8 such that the estimated coefficients vary over time and reflect the impact on production costs from industrywide economic conditions during the year....
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...(1) is estimated cross-sectionally for each industry-year with at least 15 observations, where industry is defined following Fama and French (1997), such that the estimated coefficients vary over time and reflect the impact on production costs from industry-...
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