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

  • 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)

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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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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  1. Rafael Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 2006. "What Works in Securities Laws?," Journal of Finance, American Finance Association, vol. 61(1), pages 1-32, 02.
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  10. 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.
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  12. 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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