Accrual vs. Real Earnings Management in Internationally Diversified Firms: The Role of Institutional Supervision

Yan-Jie Yang, Yunsheng Hsu, Qian Long Kweh () and Jawad Asif
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Yan-Jie Yang: College of Management, Yuan Ze University, Taoyuan City 32003, Taiwan
Yunsheng Hsu: Department of Accounting, National Chung Hsing University, Taichung City 40227, Taiwan
Qian Long Kweh: School of Management, Canadian University Dubai, Dubai P.O. Box 112223, United Arab Emirates
Jawad Asif: Department of Commerce, University of Gujrat, Gujrat 50700, Pakistan

JRFM, 2025, vol. 18, issue 7, 1-21

Abstract: This study investigates whether internationally diversified firms substitute between accrual-based and real earnings management and examines how institutional supervision moderates this relationship. Drawing on a sample of Taiwanese firms listed on the Taiwan Stock Exchange from 2003 to 2016, we conduct regression analyses to test our hypothesis. We find that internationally diversified firms actively shift between accrual and real earnings management strategies depending on the constraints they face. Specifically, firms tend to rely more on accrual-based manipulation when information asymmetry is high and switch to real earnings management when accruals are more easily detected. We also show that stronger institutional supervision—measured by information transparency and investor protection—significantly curbs accrual-based earnings management. These findings reflect the higher volatility and agency problems associated with international operations, such as exposure to foreign risks and the distance between parent and subsidiary firms. By highlighting the conditions under which firms manage earnings and the supervisory mechanisms that constrain such behavior, this study offers practical insights for managers seeking to smooth earnings, investors aiming to evaluate firm transparency, and policymakers designing regulations to deter opportunistic financial reporting.

Keywords: real earnings management; accrual manipulation; international diversification; supervision mechanism; information transparency; investor protection (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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