Uncovering Real Earnings Management: Pay Attention to Risk-Taking Behavior

Samar Alharbi, Md Al Mamun and Nader Atawnah
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Samar Alharbi: College of Administrations and Finance, Saudi Electronic University, Riyadh 13323, Saudi Arabia
Md Al Mamun: Department of Economics, Finance, and Marketing, La Trobe University, Melbourne, VIC 3086, Australia
Nader Atawnah: School of Business and Law, Edith Cowan University, Joondalup, WA 6027, Australia

IJFS, 2021, vol. 9, issue 4, 1-18

Abstract: We examine the impact of corporate risk-taking on firm-level real earnings management. We find that firms with higher risk-taking engage in higher real earnings management. Our results are robust to a series of robustness tests, including simultaneous least squares approach, firm fixed effect, change analysis, and pseudo difference-in-difference analysis. Additional analyses reveal that the impact of risk-taking on real earnings management is more pronounced among firms that experience prior-year loss and are run by top-echelons who are risk lovers. Sarbanes-Oxley Act (SOX) regulation does not attenuate the positive effect of risk-taking on real earnings management. However, external monitoring by institutional investors and takeover susceptibility curb the relation between risk-taking and real earnings management. Our study highlights that outsider, such as investors and regulators, should pay close attention to a firm’s risk-taking behavior to unravel the extent of real earnings management in the firm.

Keywords: agency theory; corporate governance; risk-taking; real earnings management (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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