Earnings management using asset sales

Purpose - The paper aims to clarify the relationship between earnings management and the sale of long‐lived assets and investments for firms listed in Taiwan. In addition, it suggests several interesting issues for further studies by proposing that positive earnings are one of the necessary conditions for the companies to issue bonds or new shares. Design/methodology/approach - The paper uses archival data and regression analysis to document empirical evidence that assets sales are one of the methods to manipulate reported earnings among 12,484 firm‐years over the period of 1984‐2006. Findings - The paper finds that approximately 54‐57 percent of firms in Taiwan with small pre‐managed earnings losses manipulate reported earnings to show small positive earnings. This is in contrast to 30‐40 percent of firms in the USA as reported by Burgstahler and Dichev. Research limitations/implications - The paper makes a good use of the unique institutional features of Taiwan. It has not produced other unique results that differ significantly from the findings of prior studies. Practical implications - The paper shows that reported earnings are viewed as a primary measure of firm performance and mechanisms behind earnings management have important implications in deriving informative summary measures of firm performance. Originality/value - The paper fulfils an identified need to study how companies listed in Taiwan to beat thresholds by selling long‐lived assets and investments and provides a comparison in earnings management with US companies. Moreover, it provides several suggestions for future studies.