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Accrual-Based and Real Earnings Management: An International Comparison for Investor Protection

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Author Info

  • Masahiro Enomoto

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

  • Fumihiko Kimura

    (Tohoku University, Sendai, Japan)

  • Tomoyasu Yamaguchi

    (Tohoku Gakuin University, Sendai, Japan)

Abstract

The purpose of this paper is to examine the differences between accrual-based and real earnings management across 38 countries. Following the international comparative research on earnings management and the research on the choice of the method of earnings management, we predict that real earnings management is preferred over accrual-based earnings management in countries with stronger investor protection. We regard legal enforcement, outside investor rights, disclosure regulations, and analyst following as constituting investor protection. Our examination is based on the data of 222,513 firm-year observations from 1991 to 2010. We show that accrual-based earnings management is inhibited, while real earnings management is implemented in the countries with stronger investor protection except for analyst following. With regard to analyst following, we find evidence that real earnings management is limited in the presence of analysts. Moreover, this result is not affected by the control of audit quality and the calculation of earnings management measures according to country and year.

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File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2012-13.pdf
File Function: Revised version, 2013
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Bibliographic Info

Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number DP2012-13.

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Length: 36 pages
Date of creation: May 2012
Date of revision: Mar 2013
Handle: RePEc:kob:dpaper:dp2012-13

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Keywords: Corporate Governance; Corporation and Securities Law; Accounting; Government Policy and Regulation;

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  1. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer, 2003. "What Works in Securities Law?," NBER Working Papers 9882, National Bureau of Economic Research, Inc.
  2. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
  3. Shen, Chung-Hua & Chih, Hsiang-Lin, 2005. "Investor protection, prospect theory, and earnings management: An international comparison of the banking industry," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2675-2697, October.
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  7. Benjamas Jirasakuldech & Donna Dudney & Thomas Zorn & John Geppert, 2011. "Financial disclosure, investor protection and stock market behavior: an international comparison," Review of Quantitative Finance and Accounting, Springer, vol. 37(2), pages 181-205, August.
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  9. SANJEEV BHOJRAJ & PAUL HRIBAR & MARC PICCONI & JOHN McINNIS, 2009. "Making Sense of Cents: An Examination of Firms That Marginally Miss or Beat Analyst Forecasts," Journal of Finance, American Finance Association, vol. 64(5), pages 2361-2388, October.
  10. Boonlert-U-Thai, Kriengkrai & Meek, Gary K. & Nabar, Sandeep, 2006. "Earnings attributes and investor-protection: International evidence," The International Journal of Accounting, Elsevier, vol. 41(4), pages 327-357, 012.
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  12. Cohen, Daniel A. & Zarowin, Paul, 2010. "Accrual-based and real earnings management activities around seasoned equity offerings," Journal of Accounting and Economics, Elsevier, vol. 50(1), pages 2-19, May.
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Cited by:
  1. Masahiro Enomoto & Fumihiko Kimura & Tomoyasu Yamaguchi, 2013. "A Cross-Country Study on the Relationship between Financial Development and Earnings Management," Discussion Paper Series DP2013-34, Research Institute for Economics & Business Administration, Kobe University.
  2. Mehmet Ünsal Memis & Emin Hüseyin Cetenak, 2012. "Earnings Management, Audit Quality and Legal Environment: An International Comparison," International Journal of Economics and Financial Issues, Econjournals, vol. 2(4), pages 460-469.

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