Does State-Owned Enterprises’ Performance Evaluation Detect Earnings Manipulation?

Chunghyeok Im, Xiyu Rong, Myung-In Kim () and Jin-Cheol Bae
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Chunghyeok Im: College of Business Administration, Inha University, Incheon 22212, Republic of Korea
Xiyu Rong: College of Accounting, Jilin University of Finance and Economics, Changchun 130117, China
Myung-In Kim: College of Business Administration, Inha University, Incheon 22212, Republic of Korea
Jin-Cheol Bae: Pt Alljium Green Nusa, Ruko Dalton Ext DLNT 052-053, Gading Serpong, Kelapa Dua, Tangerang 15810, Banten, Indonesia

Sustainability, 2025, vol. 17, issue 9, 1-19

Abstract: Performance evaluation systems serve as a crucial governance mechanism in enhancing operational efficiency and ensuring sustainable growth for state-owned enterprises (SOEs). Despite their significance, the effectiveness of these evaluation systems has received limited academic attention. This study examines how performance evaluations address earnings manipulation issues, focusing specifically on both accrual-based and real activity-based earnings management. Our empirical findings indicate that SOEs with higher accrual-based earnings management receive significantly lower ratings in performance evaluations. However, no significant relationship is observed between real activity-based management and performance evaluation ratings. These results suggest that while performance evaluations effectively account for accrual-based earnings manipulation, they fail to capture real activity-based earnings management. Our study emphasizes the need for a more nuanced approach to performance evaluation that not only detects accrual manipulation but also considers operational adjustments made by managers. Furthermore, these findings imply that performance evaluation committees and government regulators should integrate industry-specific expertise into the evaluation process to enhance the detection of real earnings manipulation, thereby strengthening governance tools in SOEs. This research contributes to the broader discourse on improving effectiveness in public sector performance assessments.

Keywords: state-owned enterprise (SOE); performance evaluation; discretionary accrual; real earnings management (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2025
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