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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)

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.

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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: 41 pages
Date of creation: May 2012
Date of revision: May 2015
Handle: RePEc:kob:dpaper:dp2012-13
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  1. Roychowdhury, Sugata, 2006. "Earnings management through real activities manipulation," Journal of Accounting and Economics, Elsevier, vol. 42(3), pages 335-370, December.
  2. 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.
  3. John R. Graham & Campbell R. Harvey & Shiva Rajgopal, 2004. "The Economic Implications of Corporate Financial Reporting," NBER Working Papers 10550, National Bureau of Economic Research, Inc.
  4. 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.
  5. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
  6. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer, . "What Works in Securities Laws?," Working Paper 19491, Harvard University OpenScholar.
  7. Dechow, Patricia M. & Kothari, S. P. & L. Watts, Ross, 1998. "The relation between earnings and cash flows," Journal of Accounting and Economics, Elsevier, vol. 25(2), pages 133-168, May.
  8. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert Vishny, 1999. "Investor Protection and Corporate Valuation," Harvard Institute of Economic Research Working Papers 1882, Harvard - Institute of Economic Research.
  9. 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.
  10. 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.
  11. 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.
  12. 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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