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The interaction between accounting and real earnings management using simultaneous equation model with panel data

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  • Sarra Elleuch Hamza

    (ISCAE)

  • Nassira Kortas

    (ISCAE)

Abstract

The aim of this paper is to examine the association between accounting-based earnings management and real activities manipulation in a weaker regulatory environment. We measure accruals-based earnings management by modified Jones model. Real earnings management is identified through sales manipulation and discretionary expenditures. The relationship between accruals-based earnings management and real earnings management is examined by using simultaneous equation systems estimated with panel data. Based on a sample of Tunisian public offering firms, our findings support not only a complementary relationship between sales manipulation and accruals-based earnings management, but also a substitutive interaction between discretionary expenditures and accruals management. Tunisian firms do not face greater scrutiny from regulators and jointly use the two alternatives of earnings management. However, when income taxation becomes the main incentive for earnings management, Tunisian firms prefer real earnings management to discretionary accrual. It implies that accounting earnings management is jointly used with some real earnings management tools and serves as substitutes for other real activities manipulations. Contrary to results of previous studies, managers can use the two earnings management alternatives as substitutes and complementary tools at the same time.

Suggested Citation

  • Sarra Elleuch Hamza & Nassira Kortas, 2019. "The interaction between accounting and real earnings management using simultaneous equation model with panel data," Review of Quantitative Finance and Accounting, Springer, vol. 53(4), pages 1195-1227, November.
    • Handle: RePEc:kap:rqfnac:v:53:y:2019:i:4:d:10.1007_s11156-018-0779-5
    DOI: 10.1007/s11156-018-0779-5
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    Cited by:

    1. Belal Ali Abdulraheem Ghaleb & Shaker Dahan Al-Duais & Abdulwahid Ahmed Hashed, 2021. "Audit Committee Chair s Legal Expertise and Real Activities Manipulation: Empirical Evidence from Malaysian Energy and Utilities Sectors," International Journal of Energy Economics and Policy, Econjournals, vol. 11(1), pages 65-73.
    2. Katarina Valaskova & Peter Adamko & Katarina Frajtova Michalikova & Jaroslav Macek, 2021. "Quo Vadis, earnings management? Analysis of manipulation determinants in Central European environment," Oeconomia Copernicana, Institute of Economic Research, vol. 12(3), pages 631-669, September.
    3. Bilal Kimouche, 2022. "Accrual-based and cash-based earnings management in Algeria: substitution or complementary," Croatian Review of Economic, Business and Social Statistics, Sciendo, vol. 8(1), pages 1-17, June.
    4. Katherine Gunny & Troy Pollard, 2023. "The role of earnings management via real activities and accrual management in PIPEs," Review of Quantitative Finance and Accounting, Springer, vol. 61(2), pages 481-500, August.

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    More about this item

    Keywords

    Accruals-based earnings management; Real earnings management; Complementary relationship; Substitutive interaction; Simultaneous equations model;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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