Earnings management to avoid earnings boosts

Naser Makarem and Clare Roberts

Journal of Applied Accounting Research, 2020, vol. 21, issue 4, 657-676

Abstract: Purpose - The purpose of this study is to investigate whether earnings boosts before the year end trigger earnings management. It examines whether firms that substantially outperformed their last year earnings during the first three quarters push their earnings down to avoid reporting earnings boosts. Design/methodology/approach - Regression analysis is used to compare earnings management of firms with earnings boosts and other firms. Findings - The results indicate that firms outperforming their last year results by the end of the third quarter manipulate their earnings downwards by means of real activities manipulation, while they do not indicate income-decreasing accruals management. It is also found that consistent with the prominent shift from accruals management to real activities manipulation, accruals management is less costly which justifies why it is used for downward manipulation. Research limitations/implications - The results are limited to one single earnings benchmark i.e. last year earnings. Further research may individually or collectively examine other benchmarks including analysts' forecasts. Practical implications - The findings suggest that users should be more vigilant of firms exceeding their last year interim results, as they could be involved in downward earnings management. Originality/value - This study documents earnings management in a new setting where earnings boosts before the year end trigger downward manipulation of real activities.

Keywords: Earnings management; Real activities manipulation; Accruals management; Quarterly earnings; M41 (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:jaarpp:jaar-01-2019-0012

DOI: 10.1108/JAAR-01-2019-0012

Access Statistics for this article

Journal of Applied Accounting Research is currently edited by Associate Professor Orthodoxia Kyriacou

More articles in Journal of Applied Accounting Research from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().