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Is there a Trade-Off between Accrual-Based and Real Earnings Management? Evidence from Equity Compensation and Market Pricing

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Abstract

Recent studies indicate a trade-off relation between accrual-based and real earnings management strategies. This paper studies the relation by examining the impact of the equity compensation of chief executive officers (CEOs) on earnings management and the market pricing of the two types of earnings management. Moreover, this study proposes a “within-group difference” approach for both the explained and explanatory variables to mitigate the over-parameter problem in the conventional fixed effects regression model for panel data. Our empirical results show that CEO equity compensation is positively associated with both accrual-based and real earnings management. Moreover, the reward of the joint effect of accrual-based and real earnings management is positive in terms of stock returns and stronger than a stand-alone strategy. Overall, our results indicate that the relation between accrual-based and real earnings management for firms is complementary rather than a trade-off.

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  • Leon Li, 2017. "Is there a Trade-Off between Accrual-Based and Real Earnings Management? Evidence from Equity Compensation and Market Pricing," Working Papers in Economics 17/24, University of Waikato.
    • Handle: RePEc:wai:econwp:17/24
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    2. Tobar Arias, José E. & Mora Valencia, Andrés & Benavides Franco, Julián, 2023. "Earnings management to avoid losses: Evidence in non-listed Colombian companies," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 53(C).
    3. Kałdoński, Michał & Jewartowski, Tomasz, 2020. "Do firms using real earnings management care about taxes? Evidence from a high book-tax conformity country," Finance Research Letters, Elsevier, vol. 35(C).
    4. Popli, Manish & Raithatha, Mehul & Goyal, Lakshmi, 2022. "Avoiding the risk of de-legitimation: Impact of internationalization on earnings management of emerging market firms," Finance Research Letters, Elsevier, vol. 48(C).
    5. Xin Cui & Shouyu Yao & Zhenming Fang & Hua Wang, 2021. "Economic policy uncertainty exposure and earnings management: evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 3937-3976, September.
    6. Mengyun Wu & Martha Coleman & Jonas Bawuah, 2020. "The Predictive Power of K-Nearest Neighbor (KNN): The Effect of Corporate Governance Mechanisms on Earnings Management," SAGE Open, , vol. 10(3), pages 21582440209, August.
    7. Bilal Kimouche, 2022. "Accrual-based and cash-based earnings management in Algeria: substitution or complementary," Croatian Review of Economic, Business and Social Statistics, Sciendo, vol. 8(1), pages 1-17, June.
    8. Martha Coleman & Mengyun Wu, 2020. "Combination of Ant Colony Optimization and K-nearest Neighbours: The Influence of Working Capital Management on Corporate Performance," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 45(4), pages 395-415, November.
    9. Xin Yao Li & Pei-Wen Chen, 2020. "Meeting Dividend Thresholds Through Earnings Management of Listed Companies in South Africa," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 10(6), pages 1-5.
    10. Saeed Rabea Baatwah & Ehsan Saleh Almoataz & Khaled Salmen Aljaaidi, 2022. "Tightened it and ruined it: Earnings management trade-off as a consequence of key audit matters disclosure," Economics Bulletin, AccessEcon, vol. 42(2), pages 678-693.
    11. Chardonnens, Patrick & Fiechter, Peter & Wallmeier, Martin, 2022. "The disappearance of the zero-earnings discontinuity: SOX, dotcom boom or gradual decline?," Finance Research Letters, Elsevier, vol. 49(C).

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    More about this item

    Keywords

    earnings management equity; equity compensation; market pricing;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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