Does Real Activities Management Influence Earnings Quality and Stock Returns in Emerging Markets? Evidence from Korea

Jeong, Kwang Hwa; Choi, Seung Uk

doi:10.1080/1540496x.2018.1535970

Cited by 16 publications

(26 citation statements)

References 24 publications

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“…The earnings management literature reports several techniques used by company managers to affect reported earnings. These techniques are considered to be key indicators of earnings quality and consequently financial reporting quality (Ali and Kamardin, 2018b;Jeong and Choi, 2019). Earnings management is defined severally in the literature, but a comprehensive definition was introduced by Healy and Wahlen (1999): "Earnings management occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers" (p. 368).…”

Section: Real Earnings Managementmentioning

confidence: 99%

Audit Committee Chair’s Legal Expertise and Real Activities Manipulation: Empirical Evidence From Malaysian Energy and Utilities Sectors

Ghaleb

Al-Duai

Hashed

2020

IJEEP

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Recent studies claim that improvements in regulations and corporate governance law in different countries are restricting accrual-based earnings management and encouraging managers to shift to real earnings management (REM). However, it is not yet clear whether audit committee (AC) directors with legal expertise are associated with higher or lower REM. Thus, this study aims to investigate the relationship between the AC chair's legal expertise and REM in the energy and utilities sectors in Malaysia. The study uses a sample of all energy and utilities companies listed on Bursa Malaysia between 2013 and 2018. Ordinary least squares (OLS) regression is applied to analyse the study data. The study finds that AC chairs with legal expertise are positively and significantly associated with REM, suggesting that they have not yet ceased REM practices. The findings add to the corporate governance and earnings management literature, and inform regulators and other readers of financial reports about the monitoring role of the AC chair.

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Section: Real Earnings Managementmentioning

confidence: 99%

Audit Committee Chair’s Legal Expertise and Real Activities Manipulation: Empirical Evidence From Malaysian Energy and Utilities Sectors

Ghaleb

Al-Duai

Hashed

2020

IJEEP

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“…In this regard , the company appoint big four audit firms are will have a good governance mechanisms that mitigate the information asymmetry and mitigate the earning management practices, which in return causes sustainable investment opportunities (Shahzad et al, 2019). This argument is supported by another study used in an emerging market such as Korean evidence (Jeong & Choi, 2019). In addition, the big audit firms have a higher control on managers and in return benefits the shareholders and societies (Hammami & Hendijani Zadeh, 2020) especially when the managers can use the companies' resources to achieve investment sustainability.…”

Section: The Moderating Effect Of Audit Quality Between Earnings Mana...mentioning

confidence: 80%

The moderating role of audit quality between earning management and sustainable investment opportunities: Evidences from gulf cooperation council countries

Alsmady

2023

IJAEFA

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This study examines the relationship between the earning management and audit quality on sustainable investment opportunities in the Gulf Cooperation Council (GCC) countries, including, Bahrain, Oman, Qatar, Saudi Arabia, Kuwait and United Arab Emirates. Further, moderating relationship of audit quality between earnings management and sustainable investment is also investigated in the present study. This study includes the data of 1337 companies and their-year observations from the period of 2011 to 2017. This study used the Panel Data Ordinary Least Squares with correlated random effect to examine the direct relationship and the moderated multiple regression to examine the moderating effects of audit quality on the earnings management and sustainable investment opportunities relationship. The results demonstrate that the earnings’ management encompasses a significant negative relationship with sustainable investment opportunities but on the other side, it also displays a positive relationship between audit quality and sustainable investment opportunities. Furthermore, the study investigates the moderating effect of audit quality on the relationship of earning management and sustainable in-vestment opportunities. Empirical evidence suggests that the audit quality plays a vital role in mitigating the agency theory problem and reducing the information asymmetry. These findings suggest that the big audit firms act as a good governance representatives for the management and it further enhances the credibility of accounting information for the new investors. This research has several usages for policymakers and investors in the GCC. The investors should assess their choice when they are investing in firms. The big auditing firms mitigates earnings management, which may raise sustainable investment opportunities. Thus, listed firms in the GCC should implement governance and disclosure practices that strengthen the credibility of financial earnings and reduce the danger for investors who later discovers poor investment decisions.

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“…Khurana et al (2018) document that REM increases the likelihood of stock price crashes because managers keep poor-performing projects through REM for their self-interests. Jeong and Choi (2019) find that REM negatively affects the future earnings response coefficient because REM severely affects the cash flows. In contrast to the above findings, Luo (2020) finds that firms with management earnings forecast are less likely to be engaged in REM because forecasts reduce information asymmetry, which in turn limit the insider's opportunistic behavior.…”

Section: Literature Reviewmentioning

confidence: 84%

Betting against real earnings management

Bansal

Ali

2022

ARA

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PurposeThe study presents the zero investment strategies based on the pricing impact of real earnings management (REM) on stock returns after taking into account the direction and endogeneity nature of REM.Design/methodology/approachThe authors use standard portfolio methodology and Fama–Macbeth cross-sectional regression to analyze the data for this study. Both upward and downward form of REM has been examined. Accrual earnings management (AEM) has been controlled while examining the association between REM and stock returns.FindingsThe findings demonstrate that the REM anomaly exists in the Indian equity market and is consistent under different market conditions and investment horizons. It is robust after controlling for cross-sectional effects and AEM. Our subsequent analysis suggests that a decile-based zero investment portfolio strategy based on REM loadings generates an annual excess return of 17.90%. The presented annual excess return is highest among quantile and mean-based investment strategies. Further, the authors find that REM sorted proposed investment strategies outperform the AEM sorted investment strategies in all spheres.Practical implicationsThe findings suggest that investors can form an arbitrage profitable investment strategy by taking a long position in the bottom 10% of negative REM stocks, and a short position in the top 10% of positive REM stocks.Originality/valueThis is the first study that examines the pricing impact of REM on stock returns and provides zero investment strategies by betting against REM.

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Does Real Activities Management Influence Earnings Quality and Stock Returns in Emerging Markets? Evidence from Korea

Cited by 16 publications

References 24 publications

Audit Committee Chair’s Legal Expertise and Real Activities Manipulation: Empirical Evidence From Malaysian Energy and Utilities Sectors

Audit Committee Chair’s Legal Expertise and Real Activities Manipulation: Empirical Evidence From Malaysian Energy and Utilities Sectors

The moderating role of audit quality between earning management and sustainable investment opportunities: Evidences from gulf cooperation council countries

Betting against real earnings management

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