The interaction between real and accrual-based earnings management: analysis based on the mandatory IFRS adoption

  • Authors

    • Mouna Sellami Department of Finance and AccountingFaculty of Economics Sciences and Management, Sfax University, Tunisia
    2016-02-02
    https://doi.org/10.14419/ijaes.v4i1.5721
  • Accrual-Based Earnings Management, Real Earnings Management, IFRS Adoption.

  • The main purpose of this paper is to examine the relation between real and accrual-based earnings management after the mandatory IFRS adoption. I focus on a sample of 124 firms drawn from the 250 French-listed companies during the period from 1999 to 2011. Empirical results indicate that French firms use real activities manipulation and discretionary accruals as complementary tools to smooth earnings. Finally, unlike previous studies, I don’t find evidence of the sequential nature between the two earnings management strategies.

  • References

    1. [1] Barth M.E., Landsman W.R., Lang M.H. (2008). International accounting standards and accounting quality. Journal of Accounting Research 46 (3): 467-498.http://dx.doi.org/10.1111/j.1475-679X.2008.00287.x.

      [2] Barton J. (2001). Does the use of financial derivatives affect earnings management decisions? Accounting Review 76: 1-26.http://dx.doi.org/10.2308/accr.2001.76.1.1.

      [3] Bartov E. (1993). The timing of asset sales and earnings manipulation. The Accounting Review 68: 840-855.

      [4] Badertscher B. (2011). Overvaluation and the choice of alternative earnings management mechanisms. The Accounting Review 86 (September): 1491–1518.http://dx.doi.org/10.2308/accr-10092.

      [5] Cohen D. A., Dey A., Lys T. Z. (2008). Real and accrual-based earnings management in the pre- and post- Sarbanes-Oxley periods. The Accounting Review 83 (3): 757-787.http://dx.doi.org/10.2308/accr.2008.83.3.757.

      [6] Cohen D.A., Zarowin P. (2010). Accrual-based and real earnings management activities around Seasoned Equity Offerings. Journal of Accounting and Economics 50 (1): 2-19.http://dx.doi.org/10.1016/j.jacceco.2010.01.002.

      [7] Dechow P.M., Skinner J.D. (2000). Earnings management: reconciling the views of accounting academics, practitioners and regulators. Accounting Horizons 14 (2): 235-250.http://dx.doi.org/10.2308/acch.2000.14.2.235.

      [8] DeFond M.L., Jiambalvo J. (1994). Debt covenant violation and manipulation of accruals. Journal of Accounting and Economics 17: 145-176. http://dx.doi.org/10.1016/0165-4101(94)90008-6.

      [9] Doukakis L.C. (2013). The effect of mandatory IFRS adoption on real and accrual-based earnings management activities. Journal of Accounting and Public Policy 33.

      [10] Eckel N. (1981).The income smoothing hypothesis revisited. Abacus: 28-40.http://dx.doi.org/10.1111/j.1467-6281.1981.tb00099.x.

      [11] Ewert R., Wagenhofer A. (2005). Economic effects of tightening accounting standards to restrict earnings management. The Accounting Review 80 (4): 1101-1124.http://dx.doi.org/10.2308/accr.2005.80.4.1101.

      [12] Fields T., Lyz T., Vincent. L. (2001). Empirical research on accounting choice. Journal of Accounting and Economics 31 (1–3): 255–308.http://dx.doi.org/10.1016/S0165-4101(01)00028-3.

      [13] Graham, J., Harvey R., Rajgopal S. (2005). The Economic Implications of Corporate Financial Reporting. Journal of Accounting and Economics 40 (1.3): 3-73.

      [14] Guidry F., Leone A., Rock S. (1999). Earnings-based bonus plans and earnings management by business unit managers. Journal of Accounting and Economics 26: 113-142.http://dx.doi.org/10.1016/S0165-4101(98)00037-8.

      [15] Guenther N., Gegenfurtner B., Kaserer C., Achleitner A. (2009). International Financial Reporting Standards and Earnings Quality: The Myth of Voluntary vs. Mandatory Adoption, Working paper series, Center for Entrepreneurial and Financial 1-44.

      [16] Gunny K. (2010). The relation between earnings management using real activities manipulation and future performance: Evidence from meeting earnings benchmarks. Contemporary Accounting Research 27 (3):855–888.http://dx.doi.org/10.1111/j.1911-3846.2010.01029.x.

      [17] Hashemi S.A., Rabiee H. (2011). The relation between real earnings management and accounting earnings management: evidence from Iran. Business and Management Review 1 (8): 25-33.

      [18] Healy P.M., Wahlen J.M (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons 13 (4): 365-383.http://dx.doi.org/10.2308/acch.1999.13.4.365.

      [19] Herrmann T., Inoue T., Thomas W.B. (2003). The sale of assets to manage earnings in Japan. Journal of Accounting Research 41(1): 89-108.http://dx.doi.org/10.1111/1475-679X.00097.

      [20] Ipino E., Parbonetti A. (2011). Mandatory IFRS Adoption: the Trade-off between Accrual and Real-based Earnings Management. Working paper. 1-59.http://dx.doi.org/10.2139/ssrn.2039711.

      [21] Kasznik R. (1999). On the association between voluntary disclosure and earnings management.Journal of Accounting Research 37: 57-81.http://dx.doi.org/10.2307/2491396.

      [22] Kuo J-M., Ning L., Song X. (2014).The real and accrual-based earnings management behaviors: Evidence from the split share structure reform in China. The International Journal of Accounting, forthcoming.http://dx.doi.org/10.1016/j.intacc.2014.01.001.

      [23] Lambert R. (1984). Income smoothing as rational equilibrium behavior.The Accounting Review 59 (4): 604-618.

      [24] Matsuura S. (2008). On the relation between real earnings management and accounting earnings management: Income smoothing. Journal of International Business Research, 7 (3): 63-77.

      [25] Pincus M., Rajgopal S. (2002). The interaction between accrual management and hedging: Evidence from oil and gas firms. Accounting Review 77: 127-160.http://dx.doi.org/10.2308/accr.2002.77.1.127.

      [26] Roychowdhury S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics 42 (3): 335-370.http://dx.doi.org/10.1016/j.jacceco.2006.01.002.

      [27] Schipper K. (1989). Commentary on earnings management. Accounting Horizons 3: 91-102.

      [28] Sellami M., Fakhfakh, H. (2014). Effect of the mandatory adoption of IFRS on real and accrual-based earnings management: Empirical evidence from France. International Journal of Accounting and Economic Studies, 2 (1): 22-33

      [29] Subramanyam K.R. (1996). The pricing of discretionary accruals. Journal of Accounting and Economics 22: 249-281. http://dx.doi.org/10.1016/S0165-4101(96)00434-X.

      [30] Sun J., Cahan S., Emanuel D. (2011). How would the mandatory adoption of IFRS affect the earnings quality of U.S. firms? Evidence from cross-listed firms in the U.S. Accounting Horizons 25 (4): 837-860.

      [31] Trueman B., Titman S. (1988). An explanation for accounting income smoothing. Journal of Accounting Research, 26 (Supplement): 127-139.http://dx.doi.org/10.2307/2491184.

      [32] Xu, R.Z., Taylor G.K., Dugan, M. (2007). Review of real earnings management literature. Journal of Accounting Literature 26: 195-228.

      [33] Zang A.Y. (2012). Evidence on the trade-off between real activities manipulation and accrual-based earnings management. The Accounting Review 87 (2): 675-703.http://dx.doi.org/10.2308/accr-10196.

      [34] Zellner A. (1962).An efficient method of estimating Seemingly Unrelated Regression equations and tests of aggregation bias. Journal of the American Statistical Association 57: 500-509.http://dx.doi.org/10.1080/01621459.1962.10480664.

      [35] Zmijewski M., Hagerman R. (1981). An income strategy approach to the positive theory of accounting standard setting/choice. Journal of Accounting and Economics 3: 129-149.http://dx.doi.org/10.1016/0165-4101(81)90010-0.

      [36] Watts R.L., Zimmerman J.L. (1990).Positive accounting theory: A ten year perspective.The Accounting Review 65 (1): 131-156.

  • Downloads

  • How to Cite

    Sellami, M. (2016). The interaction between real and accrual-based earnings management: analysis based on the mandatory IFRS adoption. International Journal of Accounting and Economics Studies, 4(1), 24-31. https://doi.org/10.14419/ijaes.v4i1.5721