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

Author

Listed:
  • 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

This paper examines the differences in accrual-based and real earnings management across countries from the perspective of investor protection. Following prior research (Leuz et al., 2003), we hypothesize that accrual-based earnings management is more constrained by strict discipline in countries with stronger investor protection. For real earnings management in countries with stronger investor protection, we have two hypotheses. One is that real earnings management is more often implemented to substitute for accrual-based earnings management. The other is that real earnings management is less often implemented, as with accrual-based earnings management. Our examination uses data from 222,513 firm-year observations drawn from 38 countries covering 1991 to 2010. The results show that managers in countries with stronger investor protection tend to engage in real earnings management instead of accrual-based earnings management. We also find that real earnings management is constrained by analyst following. Our results are not affected by the control of audit quality or the calculation method used for earnings management measures according to country and year.

Suggested Citation

  • Masahiro Enomoto & Fumihiko Kimura & Tomoyasu Yamaguchi, 2012. "Accrual-Based and Real Earnings Management: An International Comparison for Investor Protection," Discussion Paper Series DP2012-13, Research Institute for Economics & Business Administration, Kobe University, revised May 2015.
  • Handle: RePEc:kob:dpaper:dp2012-13
    as

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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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    References listed on IDEAS

    as
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    3. Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2005. "The economic implications of corporate financial reporting," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 3-73, December.
    4. 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.
    5. Rafael LaPorta & Florencio Lopez de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Harvard Institute of Economic Research Working Papers 1788, Harvard - Institute of Economic Research.
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    Citations

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    Cited by:

    1. Wu, Meng-Wen & Shen, Chung-Hua & Lu, Chin-Hwa, 2015. "Do more foreign strategic investors and more directors improve the earnings smoothing? The case of China," International Review of Economics & Finance, Elsevier, vol. 36(C), pages 3-16.
    2. Niszczota Paweł, 2015. "Social Desirability Bias and Earnings Management around the World," International Journal of Management and Economics, De Gruyter Open, pages 56-70.
    3. Campa, Domenico & Camacho-Miñano, María-del-Mar, 2015. "The impact of SME’s pre-bankruptcy financial distress on earnings management tools," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 222-234.
    4. Cupertino, César Medeiros & Martinez, Antonio Lopo & da Costa, Newton C.A., 2015. "Earnings manipulations by real activities management and investors’ perceptions," Research in International Business and Finance, Elsevier, pages 309-323.
    5. Hamidreza Vakilifard & Mahboobe Sadat Mortazavi, 2016. "The Impact of Financial Leverage on Accrual-Based and Real Earnings Management," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 6(2), pages 53-60, April.
    6. 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, revised Oct 2017.
    7. 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.

    More about this item

    Keywords

    Earnings management; Investor protection; Corporation law; Securities law; Regulation;

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • P4 - Economic Systems - - Other Economic Systems
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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