Real Earnings Management and Subsequent Operating Performance*

Leggett, Denise; Parsons, Linda M.; Reitenga, Austin L.

doi:10.2139/ssrn.1466411

Cited by 43 publications

(83 citation statements)

References 15 publications

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“…Therefore, the assessed asset value distribution given RM fluctuations has a higher variation. The finding of Leggett, Parsons, and Reitenga (2009) that a firm's RM activities change the firm's future cash flow streams could also lead to a similar inference. That is, a firm with more volatile RM activities has greater uncertainty about future cash flows and larger asset value variations, which increase the firm's credit risk based on structural credit models.…”

Section: Introductionmentioning

confidence: 80%

“…For the effects of RM levels on a firm's credit risk, due to that RM is associated with firm operating performance shown in the previous RM-related studies (e.g. Cohen & Zarowin, 2010;Gunny, 2010;Leggett et al, 2009), we hypothesise that the RM levels affect a firm's asset value, which influences the firm's credit risk (Merton, 1974). For the effects of RM variations on a firm's credit risk, Lambert et al (2007) show that the assessed variance of a firm's asset value increases with its poor quality accounting information (low precision or high variation).…”

Section: Introductionmentioning

confidence: 88%

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Real Earnings Management Uncertainty and Corporate Credit Risk

Chen

Tseng

Hsieh

2014

European Accounting Review

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This study examines the accounting information uncertainty effects on corporate credit risk from the perspective of real earnings management (RM) activities by investigating 9565 American bond observations from year 2001 to 2008. The main results show that the volatilities of RM activities significantly and positively affect corporate bond yield spreads when well-known bond spread determinant variables are controlled. In addition, the results are robust to alternative model specifications, including the suspect firm analyses, another less ambiguous measure of abnormal cash flows from operations, and abnormal production cost analyses in manufacturing industry or with control of the input price variation. This research also finds that the positive effects of RM volatilities become weaker if a firm has a lower credit rating. Finally, our results remain hold with considering endogeneity issues and analyst characteristic variables and for another estimation period of RM volatilities.

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Section: Introductionmentioning

confidence: 80%

Section: Introductionmentioning

confidence: 88%

Real Earnings Management Uncertainty and Corporate Credit Risk

Chen

Tseng

Hsieh

2014

European Accounting Review

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“…Therefore, research question this paper is trying to address is "Is there are possibility to detect earnings management using a shorter time interval?" According to Leggett, Parsons, and Reitenga (2016) real earnings management influences cash flow and operating earnings, whereas accrual earnings management influences predominantly revenues through manipulations with accounts receivable (Dechow, Sloan, & Sweeney, 1995) and the valuation of the company (Alhadab, Clacher, & Keasey, 2016). By further examination of the accounting variables involved in both real and accrual earnings management it is possible to see that the set of these variables is the same as the one used by Altman in calculating corporate liquidity 5 .…”

Section: Analysis Of Past Researchmentioning

confidence: 99%

Estimating the influence of accounting variables change on earnings management detection

Pustylnick

Temchenko

Gubarkov

2017

Journal of International Studies

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Abstract. Standard earnings management detection is performed using two routes:real earnings management (connected with inventory and expenses manipulations) and accrual earnings management (connected with revenue and accounts receivables manipulations). Neither of these two detection algorithms attempts to quantify earnings management and connect it with the infractions committed by the companies, charged by the regulator (in this case -U.S. SEC). In many known cases of revenue manipulation, it is not possible to say whether real or accrual based earnings management was used. In this research, we look at the cases of financial statement fraud, namely one of the most common variations -revenue manipulation, from the perspective of the practitioner and propose the way of detection and quantification of such manipulations. In order to distinguish the cases of earnings management, we use the components of DuPont formula. In addition, we also look at the accounting variables used in the calculation of the detection criterion and determine which ones of them play the main role in revenue manipulations.

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“…firms subsequently suffer from adverse operating performance as a result of suboptimal business decisions (Leggett et al 2009; Sohn and Kim 2009). Here, I examine the consequence of meeting earnings targets while altering operating activities management by focusing on those firms that just meet the earnings benchmarks.…”

Section: Consequence Of Real Operating Activities Management For Publmentioning

confidence: 99%

“…Managers may make sub-optimal business decisions by changing the level and the timing of operating activities to deliver earnings targets. To the extent these changes affect the amount and volatility of current and future cash flows, the firm may subsequently suffer adverse business consequences (Yen 2008; Leggett et al 2009). Moreover, the two forms of earnings management likely differ in the ease with which investors can detect them.…”

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confidence: 99%

The Influence Of Public Equity Ownership On Earnings Management Through The Manipulation Of Operational Activities

Kim¹

2014

JABR

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This paper examines whether public equity firms and private equity firms with public debt exhibit different degrees of real earnings management, defined as the manipulation of operational activities in order to influence reported earnings. Public equity firms face intense capital market scrutiny that their private equity counterparts do not. Therefore, this studys comparison of the two types of firms provides insight on the impact of capital market pressure on real earnings management behaviors. My results show that public equity firms are more likely than private equity firms to opportunistically alter normal operations to improve earnings by pushing sales through discounts and promotions, and by lowering costs of sales through overproduction. I find no difference in abnormal discretionary expenses between public equity and private equity firms. Although private equity firms with public debt do not face the same capital market pressure that public equity firms face, they are not immune from incentives to engage in real earnings management. Specifically, I find that private equity firms with public debt engage in real earnings management as their debt moves closer to default. Moreover, private equity firms with public debt that do engage in real earnings management appear to emphasize the zero earnings benchmark, consistent with prior research, suggesting that this benchmark is of primary importance to creditors.

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Real Earnings Management and Subsequent Operating Performance*

Cited by 43 publications

References 15 publications

Real Earnings Management Uncertainty and Corporate Credit Risk

Real Earnings Management Uncertainty and Corporate Credit Risk

Estimating the influence of accounting variables change on earnings management detection

The Influence Of Public Equity Ownership On Earnings Management Through The Manipulation Of Operational Activities

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