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Do firms change earnings management behavior after receiving financial forecast warnings?

Author

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  • Chung, Yu-Hsuan
  • Pan, Lee-Hsien
  • Huang, Shaio Yan
  • Chen, K.C.

Abstract

This study investigates whether government-issued financial forecast warnings are associated with earnings management in Taiwan. In particular, we examine whether firms receiving warnings use different earnings management tools than firms without warnings. We find that firms that were warned prefer to use real activities manipulation than accrual-based earnings management to avoid potential litigation and penalties. In addition, we document that firms receiving warnings employed both accrual-based and real activities earnings management especially through over-production in response to the regulatory change from mandatory to voluntary disclosure in 2005. Our results suggest that while the government warning mechanism might constrain the forecasting firms from using accrual-based earnings management, the adoption of voluntary financial forecast disclosure did not necessarily prevent them from engaging in accrual-based manipulation.

Suggested Citation

  • Chung, Yu-Hsuan & Pan, Lee-Hsien & Huang, Shaio Yan & Chen, K.C., 2015. "Do firms change earnings management behavior after receiving financial forecast warnings?," Global Finance Journal, Elsevier, vol. 27(C), pages 1-17.
    • Handle: RePEc:eee:glofin:v:27:y:2015:i:c:p:1-17
    DOI: 10.1016/j.gfj.2015.04.002
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    2. Haga, Jesper & Huhtamäki, Fredrik & Sundvik, Dennis, 2022. "Employee effort and earnings management," Global Finance Journal, Elsevier, vol. 53(C).

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    More about this item

    Keywords

    Financial forecast warning; Accrual-based earnings management; Real activities manipulation; Financial forecast disclosure regulatory change;
    All these keywords.

    JEL classification:

    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General

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