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Goal-Oriented Earnings Management: Evidence from Taiwanese Firms

Author

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  • Liming Guan
  • Fengyi Lin
  • Wenchang Fang

Abstract

Using Benford's (1938) law, this study documents pervasive evidence that managers of publicly listed Taiwanese firms tend to engage in earnings manipulative activities, rounding earnings numbers to achieve key reference points. Consistent with prior studies on rounding behavior in other countries and regions, we find that the management of Taiwanese firms often emphasizes the first digit of earnings numbers. We also find that key reference points are not limited to the first digit; the second, third, or even fourth digits are sometimes used as the reference points of rounding earnings behavior. Finally, our empirical results show that the incentives to round earnings numbers are negatively associated with the distance of prerounded earnings to the next reference point. In other words, the closer the prerounded earnings are to the reference point, the more likely managers are to round earnings. The findings of the study have important implications for banks in implementing lending policies and for external auditors in designing audit procedures.

Suggested Citation

  • Liming Guan & Fengyi Lin & Wenchang Fang, 2008. "Goal-Oriented Earnings Management: Evidence from Taiwanese Firms," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(4), pages 19-32, July.
  • Handle: RePEc:mes:emfitr:v:44:y:2008:i:4:p:19-32
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    Citations

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    Cited by:

    1. Cheng Zhao & Chong Alex Wang, 2023. "A cross-site comparison of online review manipulation using Benford’s law," Electronic Commerce Research, Springer, vol. 23(1), pages 365-406, March.
    2. Lin, Fengyi & Lin, Li-Jung & Yeh, Chin-Chen & Wang, Teng-Shih, 2018. "Does the board of directors as Fat Cats exert more earnings management? Evidence from Benford’s law," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 158-170.
    3. Sebastian Lebert & Ulf Mohrmann & Ulrike Stefani, 2021. "Rounding up performance measures in German firms: Earnings cosmetics or earnings management on a larger scale?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(3-4), pages 564-586, March.

    More about this item

    Keywords

    Benford's law; earnings management;

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