Consequences for Future Return with Earnings Management through Real Operating Activities

Abstract

This article analyzes earnings management through real operating activities by firms in the Brazilian capital market. This way of manipulating outcomes takes place when managers make suboptimal decisions in terms of timing and volume of operating activities. This study tests the hypothesis that firms engaged in earnings management through real operating activities might have a negative impact on future returns. Our analysis is restricted to nonfinancial firms listed on the Brazilian Securities, Commodities, and Futures Exchange (BM&FBOVESPA) with annual data made available by the Economatica® for the years from 1989 to 2012. Empirical tests involving regression on panel data and estimation of future firm returns and outcomes indicate a negative impact on return on assets (ROA) related to manipulation through real operating activities. This finding is useful for several stakeholders. It demonstrates that manipulation through real operating activities takes place in the Brazilian capital market, suggesting that earnings management extends beyond discretionary accounting choices in this country. The main contribution is demonstrating a negative relation between earnings management by using real operating activities and future returns. This finding is relevant for investors, particularly for the purposes of comparison and valuation of securities.

Os Principais Assuntos de Auditoria Importam? Uma análise de sua associação com o Gerenciamento de Resultados

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The Influence of a Company’s Ownership Structure on Upward Real Earnings Management

“…Real earnings management is shaped by some determinants, and it also has specific consequences for companies' activities, including the sustainability and development of a company. Researchers have found consequences of real earnings management in the form of reduction of future performance [10][11][12]. Financial transparency, including transparency of transactions, is one of the pillars of sustainability [13].…”

The Moderating Role of Earnings Management on the Relationship between Cash Flow Activities and Stock Returns in the Jordanian Manufacturing Firms

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