Earnings Rounding-up Behavior and Earnings Management

Kuang-Ku Chen, Kuo-Chih Cheng, Mei-Ling Yang and Shao-Hsi Chung
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Kuang-Ku Chen: Department of Accountancy, National Changhua of Education University, Taiwan
Kuo-Chih Cheng: Department of Accounting Information, Kun-Shan University of Technology, Taiwan
Mei-Ling Yang: Department of Accountancy, National Cheng Kung University, Taiwan and Accounting Information Department, Shih Chien University, Taiwan
Shao-Hsi Chung: Mei-ho Institution of Technology, Department of Public Finance, Taiwan

Journal of Economics and Management, 2009, vol. 5, issue 1, 135-157

Abstract: This research starts with the assumption that, in Taiwanese companies listed as "Emerging," earnings are manipulated to surpass a cognitive reference point denoted by ¡uN*10k¡v, as has been documented by Carslaw (1988) and Thomas (1989). This paper investigates whether similar manipulation exists in companies listed as TSEC and TOC listed as well. Furthermore, we extend Carslaw's (1988) and Thomas's (1989) research by examining whether managers manipulate discretionary accruals (DAs) and working capital items, representing relatively low earnings management costs to make earnings exceed such a cognitive reference point. The result shows that the listed companies of Taiwan manipulate earnings to surpass this cognitive reference point. However, this phenomenon is less significant for negative earnings than it is for positive earnings. This phenomenon is even more significant for listed companies than for emerging companies. Finally, the higher the levels of DA and working capital are, the more significant such phenomena are; this implies that DA and working capital items are used to round up earnings, and managers report earnings numbers that exceed the cognitive reference point.

Keywords: earnings management; number cognitive; discretionary accruals; rounding earnings numbers (search for similar items in EconPapers)
JEL-codes: G39 M41 (search for similar items in EconPapers)
Date: 2009
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