Earnings management in the short- and long-term post-regulation periods

Hassan Espahbodi (), Reza Espahbodi (), Kose John () and Hua Christine Xin ()
Additional contact information
Hassan Espahbodi: Western Illinois University
Reza Espahbodi: Christopher Newport University
Kose John: New York University
Hua Christine Xin: University of Louisville

Review of Quantitative Finance and Accounting, 2022, vol. 58, issue 1, No 7, 217-244

Abstract: Abstract We examine the change in the level and significance of accrual and real earnings management over the period 1996–2018. Our univariate results show that both accrual and real earnings management continue to persist, although they have significantly decreased over time. After controlling for significant factors that have been shown to affect earnings management, we find that both accrual and real-activities earnings management have significantly decreased in the short term after the regulations, but accrual earnings management reverted back to its pre-regulation levels in the long run. Further, contrary to the findings of prior research (e.g., Cohen et al. in Account Rev 83:757–787, 2008) that managers have shifted away from accruals to real earnings management in the short-term post-regulation period, we find evidence that firms actually reduced real earnings management both in the short- and long-term post-regulation periods. The results are robust to alternative sample designs and inclusion of additional control variables, and go against the widely held beliefs that accruals-based earnings management is significantly less prevalent now than it used to be.

Keywords: Accrual earnings management; Real earnings management; Regulation; Sarbanes–Oxley Act (search for similar items in EconPapers)
JEL-codes: G24 G28 M42 M48 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11156-021-00993-2

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