How does real earnings management respond to the 2007-2008 financial crisis?

Zhigang Li, Yuan-Teng Hsu and Xiang Gao

Pacific Accounting Review, 2020, vol. 32, issue 4, 495-517

Abstract: Purpose - This paper aims to investigate the dynamics of repurchase-based earnings managementvis-à-visother real activities manipulations during the 2007–2008 financial crisis. Design/methodology/approach - This paper adopts a Probit model to regress alternate real earnings management (REM) methods on a dummy variable indicating whether a firm falls in the crisis event window or not, during our 15-year sample period. This paper also detects switches made by suspected firms from repurchasing to other REM tools such as reducing discretionary expenditures. Findings - This paper provides solid evidence indicating that firms suspected of earnings management have the tendency to decrease accretive share repurchases after the onset of the crisis. Conversely, the above pattern is neither observed in non-suspect firms nor over non-crisis periods. A further investigation documents that firms that switch REM during crisis can be characterized by less cash holding, smaller size, more severe liquidity shortage and/or tighter financial constraint. Originality/value - This paper contributes to the literature on understanding the respective and interactive implications of both share repurchases and global financial crisis on firms’ REM activities.

Keywords: Financial crisis; Real earnings management; Accretive share repurchase; G01; G35; M41 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eme:parpps:par-09-2019-0119

DOI: 10.1108/PAR-09-2019-0119

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