1
Earnings management: The effect of the trade-off theory on the
Stock Price Crash Risk
Bachelor thesis – Accountancy & Control
Bas Werkhoven 11019212
Supervisor: Máté Széles
Bachelor thesis, 25th of June 2018
2
Statement of Originality
This document is written by student Bas Werkhoven who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Abstract
In this thesis, the effect of the trade-off theory by Zang (2012) on the relationship between earnings management and Stock Price Crash Risk is examined. Results are based upon the analysis of the following factors: credit rating, regulations, disclosure of information, conservatism, information asymmetry, audit quality and ownership
structure. This thesis finds that the substitution of accrual-based earnings management with real earnings management causes the Stock Price Crash Risk to decrease in the cases of improved credit ratings, stricter regulations, higher audit quality and
conservatism. Regarding the trade-off theory, no specific relationship can be found in the cases of disclosure of information, information asymmetry and ownership structure. Therefore, the trade-off theory does not influence the Stock Price Crash Risk regarding these factors.
3
Table of contents
1 Introduction 4
2 Theoretical background 6
2.1 Real earnings management 6
2.2 Accrual-based earnings management 7
2.3 Stock Price Crash Risk 8
2.4 Trade-off theory 9 3 Literature review 10 3.1 Credit rating 10 3.2 Regulations 11 3.2.1 Sarbanes-Oxley Act 11 3.2.2 IFRS 12 3.3 Disclosure of information 13 3.4 Conservatism 14 3.5 Information asymmetry 15 3.6 Audit quality 16 3.7 Ownership structure 17 4 Conclusion 19 5 Dutch summary 21 6 Reference list 22
4 1. Introduction
Earnings management is an often used strategy by the management of a firm to manipulate earnings. Manipulation of earnings is done to make sure a firm´s figures match pre-determined earnings targets. Another reason for the management to use this strategy is to keep earnings relatively stable throughout the years, thereby avoiding having exceptionally good and bad years. The most common ways of earnings management are summarised by Rodriguez (2002). He identifies five ways of earnings management being ‘’big bath restructuring charges’’, ‘’cookie jar’’ reserves, improper revenue recognition, abuse of the concept of materiality and creative acquisition accounting.
Earnings management has a positive effect on informativeness of a firm´s earnings figures. Tucker and Zarowin (2006) provide evidence on this statement by showing that stock prices provide more information about future performance when firms engage in earnings management. Furthermore, it can be argued that earnings management is seen as a positive signal for investors as a firm’s earnings tend to be more persistent when engaging in earnings management. Therefore, investors value the stock of earnings managing firms higher than non-earnings managing firms. However, earnings management does not only have positive consequences. Chen, Kim and Yao (2017) find that a higher degree of earnings management leads to a higher Stock Price Crash Risk. This is caused by a higher degree of earnings management leading to sizable negative returns in the quarter following earnings announcements. Therefore, Chen, Kim and Yao (2017) conclude that earnings management destructs firm value. This thesis contributes to existing knowledge as it analyses the effect of the trade-off theory by Zang (2012) on the relationship proved by Chen, Kim and Yao (2017) by discussing seven factors named in the literature review. This is of importance as research mostly focuses on earnings management in general. By examining the effect of accrual-based and real earnings management separately, the aim of this thesis is to illustrate management’s choice between the two methods and assess the effect of this choice on the Stock Price Crash Risk. While, Chen, Kim and Yao (2017) examine the effect of earnings management on the Stock Price Crash Risk in general, not separating accrual-based and real earnings management. Thereby, this thesis tries to illustrate to firms whether or not the substitution of earnings management methods affects their firm in a negative way. In addition to Chen, Kim and Yao (2017), this thesis paper examines when and why management substitute accrual-based and real earnings management, to then determine whether or not this substitution affects the Stock Price Crash Risk. For example, when management uses more real earnings management compared to accrual-based earnings management than before, does this affect the Stock Price Crash Risk?
As defined by Jin and Myers (2006), the Stock Price Crash Risk is created by management controlling the information disclosure about firm-specific performance to outside investors. They find that managers personally accept limited downside risk and losses, when hiding firm-specific bad news. However, if management keeps hiding bad news from outside investors, Jin and Myers (2006) find that there is a critical threshold level at which management tends to give up the hiding of bad news and, thereby, releases all accumulated bad news at once. This creates a crash in the stock price of the firm, as a large negative outlier in the returns of the firm is found by Jin and Myers (2006). Furthermore,
5
Jin and Myers (2006) argue that management is able to hide bad news due to the lack of full transparency between management and outside investors. When investors take a higher Stock Price Crash Risk into account, their valuation of the firm´s value will be lower as the risk of this value to crash in the near future is greater. Chen, Kim and Yao (2017) also conclude that a higher degree of engagement in earnings management relates to a greater Stock Price Crash Risk, which in turn enlarges the value destruction or valuation loss to shareholders.
Two important aspects of this thesis paper are accrual-based earnings management and real earnings management. The trade-off theory between these two methods of earnings management used in this thesis is found by research of Zang (2012). In addition, Wang, J. Gao and B. Gao (2017) empirically investigate how managers choose between accrual-based and real earnings management. The use of real activities earnings management tends to be higher for firms under lower government intervention, firms with higher financial leverage and lower corporate governance. On the other hand, firms with a less stringent legal environment, double-listed firms and firms with higher growth prospects engage more in accrual-based earnings management (Wang, J. Gao and B. Gao, 2017). Besides these characteristics that influence the choice between these two ways of earnings management, Zang (2012) finds evidence that supports the existence of a trade-off between accrual-based and real earnings management. According to Zang (2012) managers trade-off between the two methods based on their relative costs. Therefore, it can be argued that management substitute accrual-based and real earnings management with each other, which is defined by Zang (2012) as the trade-off theory. Evidence on this is provided in the subsection about the trade-off theory in the theoretical background. The trade-off theory between real and accrual-based earnings management can be of high value to future research. Zang (2012) finds that both real and accrual-based earnings management should be examined separately when determining a firm’s manipulation of earnings. Through a literature review this thesis paper will contribute to prior research by assessing to what degree the trade-off between real and accrual-based earnings management impacts the effect earnings management has on the Stock Price Crash Risk. In this thesis paper, the effect of management’s choice or trade-off between real and accrual-based earnings management on the Stock Price Crash Risk is evaluated. For example, when IFRS becomes mandatory, management might experience less accounting flexibility. In turn, less accounting flexibility can change management preference between real and accrual-based earnings management. This is caused by management deciding which earnings management method to use based on their relative costs. Therefore, management might substitute accrual-based earnings management with real earnings management or vice versa, as accrual-based or real earnings management becomes relatively more expensive due to the mandatory adoption of IFRS. First of all, real and accrual-based earnings management are reviewed. In addition to that, Stock Price Risk is discussed in detail. After that, the relationship between earnings management and Stock Price Crash Risk is evaluated. Furthermore the trade-off between real and accrual-based earnings management is analysed. Combining all these aspects will lead to an analysis of the effect of the trade-off on the relationship between both real and accrual-based earnings management and Stock Price Crash Risk.
6
Determining the effect the trade-off theory has on the relationship between earnings management and Stock Price Crash Risk will be done through analysing seven factors. These factors include credit ratings, regulations in the form of the Sarbanes-Oxley Act and IFRS, disclosure of information, conservatism, information asymmetry, audit quality and ownership structure. In more detail, management prefers either real or accrual-based earnings management in certain situations, depending on these factors. According to the conclusions made regarding this, the effect on the Stock Price Crash Risk can be assessed. These factors are chosen, because in combination with prior research the connection between these seven factors and Stock Price Crash Risk can be formed, incorporating the trade-off theory. Combining these parts of research will lead to the answer of the research question. All in all, in certain situations management will prefer using either real or accrual-based earnings management, this preference has an effect on the Stock Price Crash Risk which will be assessed through a literature review.
This thesis provides answers to the following research questions. When does management substitute accrual-based with real earnings management and vice versa? This question is answered in seven different situations, regarding credit ratings, regulations, disclosure of information, conservatism, information asymmetry, audit quality and ownership structure. If management substitutes one method for the other, the other research question is how this substitution of earnings management methods affects the Stock Price Crash Risk?
By answering these research questions this thesis provides insight on management trading-off the two methods of earnings management and its influence on the Stock Price Crash Risk.
2. Theoreticalbackground
In this section the main elements of this thesis are defined and clarified through the use of literature. By examining these elements, relationships can be established later on in
this thesis paper. Firstly, real earnings management is discussed in subsection 1.
Accrual-based earnings management is examined in subsection 2. Then, in the third subsection,
the Stock Price Crash Risk is discussed. Finally, the trade-off between accrual-based and
real earnings management is evaluated.
2.1 Realearningsmanagement
In this subsection real earnings management is discussed. Through the use of literature on this subject a definition is formed and examples of real economic actions are described.
Real earnings management can be described as operational activities used to alter
reported earnings in a particular way (Huang and Sun, 2017). Deng and Ong (2018) argue
that real earnings management causes disguise in real economic performance through taking real economic actions. The use of real economic actions therefore, results in an earnings boost in the current period. On the other hand, real economic actions can reduce certain costs that affect the earnings in the current period.
One of these real economic actions is described by Kim et al. (2011) as decreasing discretionary expenditures to burn cash flow which leads to the desired reported
7
earnings. Another real economic action is examined by Cohen et al. (2008). They find that managers reduce their Research & Development costs to increase reported earnings towards the target in the current period. By reducing Research & Development costs management lose the opportunity to generate revenue in the future. Essentially reducing costs in the current period pushes these costs and losses in revenue, into future periods, leading to higher costs and lower revenues in future periods. Management will most likely push these costs forward until they must recognise them all at once. This can be seen as a form of hiding bad news, which is discussed in further detail in subsection 3.
Tabassum, Kaleem and Nazir (2014) find another way of managing earnings in the current period. According to them, real earnings management is often done through offering discounts and lenient credit terms to clients. Both result in enhanced sales, thereby boosting current period’s earnings figures. In the future firms face the consequences in the form of lower Return on Assets (ROA), Return on Equity (ROE), Earnings per Share (EPS) and Price-earnings ratio (PE ratio). In addition to that, Chapman (2008) provides evidence on offering discounts and the drop in demand in the following period. He also concludes that offering discounts does boost current earnings through increased sales figures. This can be seen as the main reasons for management to use such a way of real earnings management.
Hribar, Jenkins and Johnson (2004) discuss firms repurchasing own shares as a way of real earnings management. By doing so management can increase their Earnings Per Share (EPS) to a level which narrowly beats analysts’ forecasts instead of marginally missing out.
Furthermore, Huang and Sun (2017) find another real economic action used in real earnings management being overproduction of inventory. By doing so, Cost Of Goods Sold (COGS) will be lowered which leads to higher profit margins through which reporting earning are influenced in a positive way. Again, this way of real earnings management causes negative effects in the future.
Although management is aware of the adverse consequences on long-term firm value, they are willing to use real earnings management to manipulate short-term reported earnings (Kim and Byungcherl, 2013). However, investors possess this exact knowledge and therefore, this managerial optimism causes them to assess future cash flows, of firms using REM, to be lower.
2.2 Accrual-basedearningsmanagement
In the following subsection accrual-based earnings management is described. This is done by discussing literature that outline ways of using accruals to manipulate earnings. According to Fang Li, McDowell and Moore (working paper, 2012) accruals are created due to the accrual principle, defined as recognising revenue when earned and recognising expenses when incurred. Accruals are based on estimates, as accruals are created when revenues have been earned, but can not yet be reported as client have not paid yet. Also, accruals are created when expenses have been incurred, but are not yet recorded in the accounts, for example pre-paid expenses. Furthermore, Fang Li, McDowell and Moore (working paper, 2012) state that there are two sorts of accruals, non-discretionary and
8
discretionary accruals. Discretionary accruals are relevant to this thesis as evidence by Jin and Myers (2006) concludes that discretionary accruals are used by management to manipulate earnings in an opportunistic way. These accruals are created to either increase or decrease income according to the timely recognition of revenues and costs. As discretionary accruals are based on estimates, they are relatively easy to manipulate when a satisfactory explanation for adjustments in estimates is provided to auditors of the firm’s financial reports.
In the following section different types of accruals used by management to manipulate earnings, when engaging in accrual-based earnings management, are explained. The first accrual is allowance for doubtful accounts, where the allowance can be adjusted according to the management´s judgement and estimates. Doubtful accounts present the amount management expects not to receive from clients. When manipulating doubtful accounts management can increase their expectation of these accounts leading to higher costs in the current period. By manipulating doubtful accounts management’s assumption become more conservative throughout time. Jackson and Lui (2009) found evidence on firms managing bad debts expense, the counterpart of doubtful accounts in the income statement, downwards to meet or beat analysts’ forecasts regarding EPS. Contrary to pushing costs towards future periods, management decides to recognise costs in the current period by more conservative estimates. Accumulation of over-accruals of bad debts expense in the allowance account creates a ‘’cookie jar’’ (Jackson and Lui, 2009). The same principle holds up for inventory write-offs.
In the case of inventory write-offs management needs to estimate the share of inventory that can be written off due to being unusable or unsellable. Chen et al. (2016) conclude that inventory write-offs are related to incentives to enhance earnings in future periods. In years where management expects to beat analysts’ expectations, estimates become more conservative to create the ‘’cookie jar’’ effect. By assuming higher amounts of write-offs, being conservative, amounts accumulate over the years. The ‘’cookie jar’’ shrinks again in exchange for lower incurred costs in that period, meaning management enhance earnings in this future period. When management adjusts estimates downwards significantly, this has two consequences. Firstly, costs incurred in that period are lower leading to higher earnings. Secondly, the accumulated over-accruals that create the ‘’cookie jar’’ compensate the difference between actual and estimated bad debt expense and thereby decrease.
Another way of increasing earnings can be done by adjusting the percentage of completion of long-term contracts. Different methods can be implemented to estimate the percentage of completion, the higher this percentage is the more revenue and costs need to be recognised. If a long-term contract is profitable, more profit can be realised when management adjusts the percentage of completion upwards.
2.3 StockPriceCrashRisk
In the next subsection Stok Price Crash Risk is defined. In addition to that several factors that affect the Stock Price Crash Risk are evaluated.
Stock Price Crash Risk is characterised by the probability of firm’s stock prices crashing. This probability largely depend on the hoarding of bad news and acceleration of good
9
news as this increases Stock Price Crash Risk according to Jin and Myers (2006). Khurana, Pereira and Zhang (2018) see the flow of information towards the market and real decision making as influential factors as these facilitate the bad-news hoarding. According to Hutton et al. (2009) the accumulation of bad news reaches a tipping point or management’s incentive for hiding bad news collapses. In these two situations the large amount of negative information will all at once be released to the capital market and investors. This leads to a sudden crash in stock prices. Accrual-based and real earnings management can be used as instruments to manipulate the information that is provided to the market. Manipulation can be both accelerating good news and delaying bad news. Therefore, both methods can have an impact on bad-news hoarding and, in turn, Stock Price Crash Risk.
However, accrual-based and real earnings management could be used by management for different reasons that could not have a Stock Price Crash Risk enhancing effect. According to Khurana, Pereira and Zhang (2018) there are four main reasons as to why accrual-based and real earnings management can reduce firm risk. Firstly, both methods can be used to communicate private information about future firm performance and firm risk to outsiders. This communication towards investors can reduce their perception of Stock Price Crash Risk. Secondly, these methods can be used as a tool of risk management, when thereby reducing firm risk it also reduces Stock Price Crash Risk. Third, earnings management can be used to understate earnings in response to positive earnings surprises. This can reduce firm risk by delaying the reporting of good news, contrary to the belief that managers use earnings management to delay bad news leading to bad-news hoarding. Last, if earnings management represents an optimal equilibrium as shown in the analytical framework developed by Lambert (1984), earnings management will not be associated with Stock Price Crash Risk.
The four mentioned reasons above illustrate underlying motives as to why management engages in earnings management. Without determining these underlying motives, the result of engaging in earnings management might not as be always negative when looking at the Stock Price Crash Risk.
2.4 Trade-offbetweenaccrual-basedandrealearningsmanagement
Management uses two ways of manipulating figures to reach their goals being accrual-based and real earnings management. Choosing between both methods depends on the seven factors that are analysed in the literature review of this thesis.
First of all, Zang (2012) examines the trade-off between accrual-based and real earnings management. Finding evidence for management’s trade-off decision being influenced by the costs and timing of earnings management. In addition to that, Zang (2012) concludes that when accrual-based earnings management is constraint due to limited accounting flexibility managers tend to use real earnings management to a greater extent. Therefore, Zang (2012) concludes that both methods of earnings management are used as substitutes. Further on in this thesis paper situations and reasons are discussed in which managers tend to use one of the earnings management methods over the other.
In addition to the evidence Zang (2012) finds, Ipino and Parbonetti (2011) document a decrease in the use of accrual-based earnings management in countries with strict
10
enforcement regimes after the mandatory adoption of IFRS. These results suggest that the reduced flexibility that is caused by IFRS leads to a switch from real to accrual-based earnings management, which supports research by Zang (2012).
Guo, Li and Zhang (2018) provide additional evidence on the trade-off between accrual-based and real earnings management stated as the degree of real earnings management significantly influencing the measurement of accrual-based earnings management. According to this evidence the level of accrual-based earnings management depends on the degree of use of real earnings management, supporting the theory of both methods acting as substitutes.
Furthermore, Graham, Harvey and Rajgopal (2005) suggest that the likelihood of detection plays a role in the decision making of management regarding earnings management. They conclude that real earnings management is less likely to be scrutinised by auditors and regulators, meaning there is a higher probability that the use of real earnings management is not detected by outsiders.
3. Literaturereview
In the following section the literature review is displayed. In the literature review several factors are analysed and their relationship with the Stock Price Crash Risk and the trade-off theory are discussed. Firstly, credit rating is evaluated. Secondly, regulations are discussed and separated in two parts. Being the Sarbanes-Oxley Act and IFRS. This is followed by the subsection including the disclosure of information. Then, conservatism is evaluated in the fourth subsection. In the fifth subsection information asymmetry is discussed. Furthermore, audit quality is analysed in the next subsection. Finally, ownership is the last factor to be analysed in this literature review.
3.1 Creditrating
Another finding by Khurana, Pereira and Zhang (2018) is that the effect of real earnings management on Stock Price Crash Risk is weaker when a firm’s credit rating changes from a minus to middle notch rating. The improvement in credit rating results in less pressure for management to use real earnings management. This is consistent with the view that real earnings management can be informative when pressure on management is lower. Besides that, Kim, Kim and Song (2013) provide evidence on management actively engaging in real earnings management rather than accrual-based earnings management when trying to influence their future credit rating. Therefore, management tends to substitute accrual-based earnings management for real earnings management. Reason to do so according to Kim, Kim and Song is relatively less scrutiny and litigation risk regarding real earnings management. Kim, Kim and Song (2013) argue that credit ratings agencies see accrual-based earnings management as a negative signal, while real earnings management might not be detected. This higher engagement in real earnings management is positively associated with upgraded credit ratings, however, no association between credit downgrades and earnings management is found. To conclude, when credit ratings are upgraded, firms tend to engage more in real earnings management before this change in credit rating. However, when credit ratings are downgraded, there is no evidence found on changes in earnings management.
11
When the financial situation of a firm is healthier, firms achieve higher credit ratings (Kim, Kim and Song, 2013). Suppliers are, in turn, more likely to provide trade credit to firms in healthier situations. In this case customers finance their operations by delaying payment to suppliers (Kim, Kim and Song, 2013). Combining evidence leads to an increase in real earnings management being the cause of greater engagement in trade credit financing. According to Kim, Kim and Song (2013) and Cao et al. (2017) trade credit financing has a negative effect on the Stock Price Crash Risk. Firstly, firms put a high level of stake in the firm when they provide trade credit. Thereby, suppliers experience incentives to monitor the client’s operations. This increased monitoring of operations causes the firm’s management to give up opportunistic behaviour as the suppliers can threaten to collect trade credit more quickly (Kim, Kim and Song, 2013). Kim et al. (2011) provides evidence on opportunistic behaviour being positively associated with the Stock Price Crash Risk. Therefore, evidence provided by Kim, Kim and Song (2013) is negatively related to the Stock Price Crash Risk.
Secondly, firms relying on trade credit financing are in general more financially constrained (Petersen and Rajan, 1997). For this reason, firms are incentivised to improve information disclosure (Kim, Kim and Song, 2013). Kim, Kim and Song (2013) provide evidence on improved disclosure of information leading to reduced information asymmetry and a lower Stock Price Crash Risk.
Combining evidence of these research papers, conclusions can be made that the substitution of accrual-based earnings management with real earnings management only affects Stock Price Crash Risk negatively when credit ratings are upgraded. Therefore, management intentions are essential when determining the effect of credit ratings on Stock Price Crash Risk. Only when management use real earnings management in order to force in increase in credit rating, this relationship holds up. In general, the reduced pressure on management when credit ratings are upgraded results in less engagement in earnings management overall. Less earnings management causes Stock Price Crash Risk to decline. Further research is necessary to determine the effect of increased real earnings management, when trying to upgrade credit ratings, on Stock Price Crash Risk.
3.2 Regulations
3.2.1 Sarbanes-OxleyAct
Chen, Kim and Yao (2017)’s results show that earnings management supports the managerial reporting opportunism rather than the private information signalling. Managerial reporting opportunism reflects that a higher degree of earnings management within a firm results in higher Stock Price Crash Risk. On the other hand, private information signalling is seen as the communication of private information on the future performance of a firm between management and outside investors (Sankar and Subramanyam, 2001). These findings are in line with other research that shows management use earnings management as a way to hide bad news for their private gains (Levitt, 1998 ; Leuz, Nanda and Wysocki, 2003).
Hiding bad news results in hoarding, until a tipping point is reached. At that point in time news is particularly bad and management can no longer hoard the bad news, thereby releasing all bad news at once causing a stock price crash (Chen, Kim and Yao, 2017).
12
Becker et al. (1998) show that accounting flexibility allows management to hide bad news, however, Graham, Harvey and Rajgopal (2005) find that accrual-based earnings management is constrained by this flexibility within the firm. In addition, Hutton, Marcus and Tehranian (2009) conclude that the effect on Stock Price Crash Risk due to hoarding of bad news has declined after the introduction of Sarbanes-Oxley Act. The decline is mainly caused by the restricted ability of managers to hide bad news. The introduction of the Sarbanes-Oxley Act includes greater monitoring and scrutiny of accounting practices according to Marcus, Hutton and Tehranian (2009). Therefore, earnings management is substantially subsided and management’s ability to hide bad news decreases.
Furthermore, both Cohen, Dey and Lys (2008) and Graham, Harvey and Rajgopal (2005) find that the increased penalties for earnings manipulation in the Sarbanes-Oxley Act cause a decrease in the use of accrual-based earnings management. Using the knowledge of Khurana, Pereira and Zhang (2018) about accrual-based earnings management increasing the Stock Price Crash Risk, conclusions can be made that in this case the Stock Price Crash Risk decreases. While accrual-based earnings management decreases, Cohen, Dey and Lys (2008) find that the level of real earnings management increases with the passage of the Sarbanes-Oxley Act. Therefore, using the trade-off theory, stricter regulations in the form of the Sarbanes-Oxley Act, management chooses to substitute the use of accrual-based earnings management with real earnings management. This substitution goes along with a decrease in the Stock Price Crash Risk (Cohen, Dey and Lys, 2008 ; Graha, Harvey and Rajgopal, 2005 ; Khurana, Pereira and Zhang, 2018).
However, results of Cohen, Dey and Lys (2008) should be interpreted carefully as more factors have an influence on the decrease of accrual-based earnings management during the introduction of the Sarbanes-Oxley Act. Due to scandals like Enron, Cohen, Dey and Lys (2008) see less overconfidence of management and greater monitoring by auditors and regulators as factors that are indirectly related to the decrease in accrual-based earnings management.
3.2 Regulations
3.2.2 IFRS
Besides the introduction of the Sarbanes-Oxley Act, the mandatory adoption of IFRS results in stricter accounting regulations for firms. Ipino and Parbonetti (2017) find that certain firms substitute accrual-based earnings management for real earnings management. This especially concerns firms located in countries with strict enforcement regimes. However, Ipino and Parbonetti (2017) find no evidence of a decrease in earnings management in general after the mandatory adoption of IFRS.
On the other hand, Yeung and Lento (2018) find evidence on increased audit quality reducing the Stock Price Crash Risk. Yeung and Lento (2018) find the negative association of audit quality on Stock Price Crash Risk to be stronger after mandatory adoption of IFRS. Thereby suggesting firms and regulators to keep improving audit quality in order to reduce Stock Price Crash Risk. Increased audit quality due to the mandatory adoption of IFRS results in enhanced transparency (DeFond, Hung, Li and Li, 2012). Enhanced transparency causes the Stock Price Crash Risk to decrease. However, DeFond, Hung, Li
13
and Li (2012) also find that IFRS’s fair value provisions increase the Stock Price Crash Risk, due to more accounting flexibility for management.
In addition, Lim, Kang and Kim (2016) provide supporting evidence of mandatory adoption of IFRS leading to reduced Stock Price Crash Risk. In their study the result are applicable to firms audited by the big four. Using evidence from Lim, Kang and Kim (2016), Yeung and Lento (2018) and Ipino and Parbonetti (2017) on the trade-off theory, this results in management substituting accrual-based earnings management for real earnings management due to the implementation of IFRS. Furthermore, Doukakis (2014) finds that the total level of earnings management, both accrual-based and real, remains unchanged despite the mandatory adoption of IFRS.
To conclude, the evidence of Yeung and Lento (2018), Lim, Kang and Kim (2016), Ipino and Parbonetti (2017) and Doukakis (2014) suggest that due to mandatory adoption of IFRS, the total level of earnings management remains unchanged and Stock Price Crash Risk is reduced. The trade-off theory causes management to substitute accrual-based earnings management for real earnings management, which results in a reduced Stock Price Crash Risk. These suggestions are in line with evidence regarding the introduction of the Sarbanes-Oxley Act. In both situation the trade-off theory sees management substitute accrual-based earnings management for real earnings management. However, no evidence is provided on the change in both earnings management methods put together. Assuming no evidence on a change in total earnings management leads to no change in total, accrual-earnings management is perfectly substituted by real earnings management. This substitution of earnings management methods causes a reduction in Stock Price Crash Risk for firms that mandatorily adopted IFRS.
3.3 Disclosureofinformation
Besides stricter regulations, disclosure of information is another factor that influences the Stock Price Crash Risk. Hamm, Li and Ng (2012) argue that there are two possible consequences of management earnings guidance, which implicates the disclosure of accounting information. Firstly, guidance can reduce the Stock Price Crash Risk as it reveals additional information about firm specific declining business conditions. Leuz and Verrecchia (2000) support this view as evidence is found on more disclosure leading to higher quality disclosure. Therefore, a higher level of disclosure reduces the Stock Price Crash Risk. Secondly, management earnings guidance can also be used opportunistically to hoard bad news. Hoarding bad news leads to an increase in Stock Price Crash Risk (Jin and Meyers, 2006).
Overall, Hamm, Li and Ng (2012) find that revealing additional information which reduces Stock Price Crash Risk happens when disclosing accounting information is mandatory and audited. This is the case in the mandatory adoption of IFRS, discussed in the section above. On the other hand, the opportunistic use of non-audited and voluntary use of guidance results in an increase of the Stock Price Crash Risk.
The opportunistic use of non-audited and voluntary disclosure of financial information increases the Stock Price Crash Risk (Lim, Kang and Kim, 2016). Lim, Kang and Kim (2016) find that when management is given the opportunity to manipulate financial information through voluntary disclosure, management does so when incentives are high, monitoring
14
is weak. By doing so, management is able to hide bad news from outside investors, thereby increasing the Stock Price Crash Risk. However, voluntary disclosure is not always used for opportunistic purposes. Haggard et al. (2008) find that low voluntary disclosure levels lead to an increased Stock Price Crash Risk. This result suggests that the use of voluntary disclosure of firm specific information can lead to a decrease in Stock Price Crash Risk, proving that voluntary disclosure of firm specific information can be informative to outside shareholders.
An explanation of the increase in Stock Price Crash Risk that Haggard et al. (2008) find is given by the results of Zhou and Lobo (2001). They find that firms that disclose less information tend to engage more in earnings management and vice versa. Contrary to Verrecchia (1983), as evidence is provided on that managers have incentives to disclose information even though it proves to be costly. This disclosure of information is considered to be both voluntary and mandatory. Therefore, the trade-off theory has little to no influence on this relationship as management tends to substitute accrual-based and real earnings management based on their costs.
3.4 Conservatism
Jackson and Lui (2009) find that conservatism facilitates earnings management. Firms tend to use accounts like bad debt to manipulate earnings. Through these accounts estimates become more conservative overtime according to Jackson and Lui (2009). Managing accounts like bad debt is seen as accrual-based earnings management. Therefore, Jackson and Lui (2009) conclude that conservative allowances accentuate the extent to which firms engage in accrual-based earnings management. Their research argues that stricter limits on the amount by which firms are allowed to over- or understate net assets reduce management’s ability to engage in accrual-based earnings management. This has been discussed in the subsection regarding regulations.
Both Kousenidis, Ladas and Negakis (2014) and Kim and Zhang (2016) find that conditional conservatism reduces the Stock Price Crash Risk as it limits management’s incentive and ability to overstate performance and hide bad news from outside investors. Conditional conservatism is defined by Kim and Zhang (2016) as timelier recognition of bad news as losses than of goods news as gains.
According to LaFond and Watts (2008) conservatism offsets management’s ability to hide bad news from outside investors and accelerate the release of good news. Furthermore, Kim and Zhang (2016) conclude that conservatism prevents management from accumulating bad news. Their findings suggest that conservatism restricts management’s incentive and ability to over- or understate performance in an opportunistic way. In turn, this reduces the chance of a large amount of bad news being released to outside investors all at once. These findings implicate that a higher level of conservatism, results in a reduced Stock Price Crash Risk. This relationship is stronger for firms with greater information asymmetry, these are firms with relatively high R&D investments, higher industry concentration and lower analyst coverage (Kim and Zhang, 2016). Furthermore, Andreou et al. (2016) finds supporting evidence pointing out that accounting conservatism decreases the Stock Price Crash Risk regardless of the economic state a country is in. Besides this, accounting conservatism reduces the agency problem between
15
management and outside investors. Both of these results make it more important for firms to implement practices that prevent hoarding of bad news within firms.
As Jackson and Lui (2009) find that due to conservatism management tends to engage more in accrual-based earnings management, there is evidence by Kangarluei and Hesar (2011) which suggests otherwise. Their results indicate a decrease in the use of accrual-based earnings management, when conservatism increases. In addition, results of Kangarluei and Hesar (2011) suggest that conservatism decreases management’s ability in earnings management. However, management tends to manipulate earnings more often through selling, general and administrative expenses when conservatism increases. Therefore, Kangarluei and Hesar (2011) find that conservatism stimulates this way of real earnings management.
Supporting literature by Lafond and Watts (2008) and Zhang (2008) finds that accounting conservatism supports monitoring and governance by limiting management’s ability to over- or understate financial performance opportunistically. As discussed earlier, limited ability in over- or understating financial reports is seen as limited ‘’accounting flexibility’’ (Graham, Harvey and Rajgopal, 2005). This causes management to substitute accrual-based earnings management with real earnings management. These suggestions are contrary to findings of Jackson and Lui (2009), but in line with research by Kangarluei and Hesar (2011).
All in all, combining all findings results in the conclusion that conservatism increases limitations for management to engage in accrual-based earnings management. Therefore, management chooses to substitute accrual-based earnings management with real earnings management. This trade-off causes the Stock Price Crash Risk to decrease. This is mainly caused by the limitations management encounters when wanting to engage in accrual-based earnings management. To conclude, these findings suggest that the trade-off theory causes the Stock Price Crash Risk to decrease, when conservatism increases, due to the substitution of accrual-based earnings management with real earnings management.
3.5 Informationasymmetry
The following subsection discusses information asymmetry as an influence on Stock Price Crash Risk. Furthermore, the effect of the trade-off theory on this relationship is assessed. Analytical models by Trueman and Titman (1988) have provided evidence on the necessity of information asymmetry between management and outside investors to engage in earnings management.
Firstly, Khurana, Pereira and Zhang (2018) find that management has more opportunities to manipulate earnings through real activities when information asymmetry is high. In addition, Andreou et al. (2016) find a greater impact of governance on the Stock Price Crash Risk when information asymmetry is higher. Therefore, high information asymmetry does not only directly increase earnings management, but also enlarges effects like governance, which indirectly leads to a decrease in the Stock Price Crash Risk. These results suggest both an increase and decrease in Stock Price Crash Risk due to information asymmetry. However, in this case the direct relationship that Khurana, Pereira and Zhang (2018) find out weights the results of Andreou et al. (2016). Andreou
16
et al. (2016) only find that the relationship discussed in subsection ownership structure regarding governance is greater when information asymmetry is high. To conclude, information asymmetry tends to enhance the Stock Price Crash Risk through the increased use of real earnings management that Khurana, Pereira and Zhang (2018) find. In addition, Richardson (2000) finds evidence on a higher level of information asymmetry between management and outside investors, leading to an increase in the engagement in managing earnings through accruals. Thereby suggesting information asymmetry leads to an increase in accrual-based earnings management. In this case the Stock Price Crash Risk increases as well, however, it is explained by the increase in the use of accrual-based earnings management.
On the other hand, Abad et al. (2018) find a different relationship between real earnings management and information asymmetry. Their results indicate an increase in information asymmetry among investors when firms manipulate earnings through real activities. A firms strategy regarding real earnings management garbles the market and thereby creates information asymmetry between investors. These results show an opposite relationship when comparing to results of Khurana, Pereira and Zhang (2018). Thus, the results of Abad et al. (2018) suggest that the high level information asymmetry, that causes the Stock Price Crash Risk to increase through the increased use of real earnings management, is created by this same increase in real earnings management. As evidence regarding the increase in real earnings management when information asymmetry is high is inconclusive, no conclusions can be made. Only evidence by Richardson (2000) proves an increase in accrual-based earnings management when information asymmetry is high. Therefore, nothing can be said about whether or not this increase in the Stock Price Crash Risk is the result of a substitution between accrual-based and real earnings management.
All in all, no evidence can be formed that the trade-off theory increases the Stock Price Crash Risk when information asymmetry is high. It is not clear whether the trade-off theory affects the Stock Price Crash Risk as both accrual-based and real earnings management increase when information asymmetry is high.
3.6 AuditQuality
Furthermore, in this subsection audit quality is discussed as another factor that affects Stock Price Crash Risk. First of all, audit quality is defined by DeAngelo (1981) as the joint probability that an auditor will discover and report material misstatements found in firm’s financial statements.
Lim, Kim and Kang (2016) find evidence on a decreasing effect on Stock Price Crash Risk when firms are audited by one of the big four auditor companies. This effects holds up for above-median firms, as explained by Lim, Kim and Kang (2016). Above-median firms are described as firms that belong in the good public information category. These terms are based on and explained in prior literature by Ayers and Freeman (2000) and Collins, Kothari and Rayburn (1987). In addition, big four auditors are high quality auditors who cut risks in the financial markets (Chang, Dasgupta and Hilary, 2009). After all, Lim, Kim
17
and Kang (2016) come to the conclusion that higher audit quality results in a decrease in Stock Price Crash Risk.
According to Khajavi and Zare (2016) auditing is an obstacle for management regarding the avoidance of disclosing both positive and negative information. In their research evidence is provided on audit quality being negatively associated with Stock Price Crash Risk. Their observations conclude that a more accurate audit and investigation of financial statements, will better prevent management from accumulating bad news, thereby reducing Stock Price Crash Risk.
In addition, Becker et al. (1998) show that use of accrual-based earnings management is lower for firms audited by the big four audit firms. They conclude that lower audit quality is associated with more ‘’accounting flexibility’’. As discussed earlier in this thesis, more ‘’accounting flexibility’’ gives management more ability to hide bad news, which increases Stock Price Crash Risk (Graham, Harvey and Rajgopal, 2005). Therefore, higher audit quality leads to less ‘’accounting flexibility’’, which in turn better prevents management form hiding bad news. Less ‘’accounting flexibility’’ restricts the use of accrual-based earnings management as discussed in the following paragraph.
Both (Krishnan, 2003; Balsam et al. 2003) find supporting evidence on accrual-based earnings management being constrained for firms engaging with high-quality auditors. These results suggest that high audit quality limits the use of accrual-based earnings management as the risk of an auditor discovering this behaviour is higher. In addition, according to Burnett et al. (2012) auditors do not scrutinise the use of real earnings management as auditors are not required to evaluate management’s choices and decisions regarding real activities. These conditions result in evidence found by Burnett et al. (2012) on management trading-off real earnings management with accrual-based earnings management when faced with high audit quality. The trade-off theory thereby shows a preference for real earnings management when firms are confronted with higher quality audits.
Not only substitution of earnings management methods, but a reduction in total earnings management due to high-quality auditors is found by Khalil and Ozkan (2016). These results implicate that the substitution of accrual-based earnings management with real earnings management causes a reduction in overall earnings management, in the case of high audit quality.
Combining evidence of the effect of audit quality on Stock Price Crash Risk and the trade-off between earnings management methods due to high audit quality, results in a higher use of real earnings management that leads to an increase in Stock Price Crash Risk. While the overall level of earnings management decreases.
3.7 Ownershipstructure
The final factor that is discussed in this thesis is ownership. First of all, Alves (2012) finds less incentives for management to manipulate reported accounting information when they own a significant portion of the equity of the firm. Managerial ownership being negatively associated with the engagement in earnings management in general is supported by evidence of Ali et al. (2008) and Banderlipe (2009). This inside ownership
18
aligns interests of management and shareholders, resulting in less incentives to engage in earnings management to hide bad news, which reduces the Stock Price Crash Risk (Andreou et al., 2016). However, findings by Andreou et al. (2016) suggest that the effect of insider ownership takes place slowly within firms. This implicates that management buying firms stock, does not immediately affects engagement in earnings management and the Stock Price Crash Risk. However, Yeung and Lento (2018) find that the greater the percentage of shares owned by management, the greater the Stock Price Crash Risk for the firm.
As in Ali et al. (2008) and Iturriaga and Hoffmann (2005), Alves (2012) finds significantly lower levels of earnings management when firms have higher ownership concentration. Therefore, Alves (2012) implicates that firms with large shareholders have a reduced scope of managerial opportunism. This conclusion is made as shareholders who own a large portion of equity cause the majority of the ownership to be in hands of a few shareholders. The larger fraction of equity held by fewer people, the higher ownership concentration. According to Boubaker, Mansali and Rjiba (2014) concentrated ownership improves the informational environment of a firm, which facilitates the spreading of firm specific information across the financial market. This reduces the agency problem between management and outside investors which has a negative effect on the Stock Price Crash Risk. Again, Yeung and Lento (2018) find contrary evidence. Their results imply that both the higher the percentage of shares owned by the top ten shareholders and management, the higher the Stock Price Crash Risk. The Stock Price Crash Risk is increased as a result of weaker ownership structure caused by the shares held by the top ten shareholders and management. Overall, Yeung and Lento (2018) findings are consistent with the view of a stronger ownership structure leading to a reduction in the Stock Price Crash Risk.
Furthermore, Alves (2012) finds no significant relationship for institutional ownership leading to more engagement in accrual-based earnings management. However, contrary to findings by Alves (2012), Kim et al. (2011), Kim and Zhang (2016) and Callen and Fang (2013) find institutional ownership to increase Stock Price Crash Risk.
Besides that, Alves (2012) also finds a decrease in engagement in earnings management when board size is high. This finding is explained by the greater monitoring activity when the board consists of more members. However, for smaller firms increasing board size will have significantly more effect. This is causes by the relationship of larger firms having a greater board size and as board size increases, boards become less effective at monitoring management. This finding is in line with results of Kao and Chen (2004), who find that a higher number of directors on the board increases the likelihood of management engaging in accrual-based earnings management. To conclude, these results suggest that smaller board size is more effective in monitoring management’s behaviour resulting in a decrease in accrual-based earnings management. Less engagement in accrual-based earnings management reduces the Stock Price Crash Risk, as earlier discussed in this thesis (Khurana, Pereira and Zhang, 2018).
Contrary to findings by Alves (2012) and Kao and Chen (2004), Andreou et al. (2016) find a negative relationship between board size and the Stock Price Crash Risk. The explanation for this relationship is that larger boards are more likely to mitigate the
19
agency conflicts that increase the Stock Price Crash Risk. As far as board size is related to the Stock Price Crash Risk, Yeung and Lento (2018) find no significant relationship between board structure and the Stock Price Crash Risk. Suggesting that only board size is positively or negatively associated with Stock Price Crash Risk.
4. Conclusion.
The final section of this thesis consists of the conclusion. This section starts with the conclusion that is based on the seven subsection of the literature review. This conclusion also answers the two research questions. As conclusions are made for every subsection, this joins together the two research questions for the purpose of this thesis.
Firstly, management can trade-off accrual-based earnings management for real earnings management. As is the case with credit ratings. When management intend to use earnings management in order to upgrade their firm’s credit rating, they prefer using real earnings management as it is harder to detect by credit agencies and the litigation risk is lower than with using accrual-based earnings management. This trade-off of accrual-based earnings management for real earnings management leads to a lower Stock Price Crash Risk. However, this conclusion should be interpreted carefully as this only holds for firms engaging in real earnings management in order to upgrade their credit rating. When this is successfully done, management will have less incentives to engage in earnings management in general as their credit rating is already upgraded.
Furthermore, the introduction of the Sarbanes-Oxley Act caused firms to have less accounting flexibility. Leading to restricted ability to adjust estimates regarding allowance for doubtful accounts, inventory write-offs and percentage of completion contracts. Combined with the increased penalties for accrual-based earnings management introduced by the Sarbanes-Oxley Act, these are the two main reasons why management substitutes accrual-based earnings management for real earnings management. In addition, just like the Sarbanes-Oxley Act, IFRS results in less accounting flexibility. For this same reason, management prefers to use real earnings management. The reason for this is the lower detectability of real earnings management. Due to the stricter regulations there is less room to adjust estimates, which results in easier detection of accrual-based earnings management, when continuing to do so. In both cases a substitution of accrual-based earnings management for real earnings management is found. Evidence fully supports a decrease in the Stock Price Crash Risk regarding the introduction of the Sarbanes-Oxley Act. This is the case for the mandatory adoption of IFRS as well, however, results should be interpreted carefully as this evidence only holds up for firms audited by the big four.
On the other hand, disclosure of information does not influence the trade-off between accrual-based and real earnings management. Both voluntary and mandatory disclosure of information do not restrict the use of either method of earnings management. Furthermore, the costs of both earnings management methods are not influenced by the disclosure of information. Therefore, no conclusions can de made regarding a trade-off between earnings management methods. However, there are two possible theories regarding the Stock Price Crash Risk. Firstly, the Stock Price Crash Risk can decrease as firms disclose information that is mandatory and audited. Secondly, the Stock Price Crash
20
Risk can increase when firms voluntarily disclose non-audited information. In the second case firms tend to use this disclosure in an opportunistic way, thereby, hoarding bad news. The subsections conservatism and information asymmetry consist of mixed evidence. However, regarding conservatism, most evidence supports the substitution of accrual-based earnings management with real earnings management as monitoring and government intervention are higher. This limited ability in over- and understating performance leads to management more often using selling, general and administrative expenses, a form of real earnings management, to manipulate their earnings. Again, the substitution of accrual-based earnings management for real earnings management results in a decrease in the Stock Price Crash Risk, just like the subsections credit rating and regulations.
For information asymmetry, no conclusion can be made as evidence supports an increase in both accrual-based and real earnings management. Therefore, there is no evidence that management trade-off between both methods of earnings management when information asymmetry is high. However, the increased engagement in both accrual-based and real earnings management does increase the Stock Price Crash Risk.
Furthermore, higher audit quality better prevents management from being able to hide bad news. Besides that, higher audit quality leads to decreased accounting flexibility. This evidence supports the view that management thereby prefers real earnings management. Management trade-off accrual-based earnings management with real earnings management. However, the level of earnings management in total decreases, which means the decrease in accrual-based earnings management is bigger than the increase in real earnings management. This implicates that accrual-based and real earnings management are not perfectly substituted. However, higher audit quality causes the Stock Price Crash Risk to decrease as management tends to engage more in real earnings management.
For ownership structure contrary evidence is found. On one hand, management experience less incentives to engage in earnings management as the ownership concentration is higher and as management own a larger portion of shares. While on the other hand, the Stock Price Crash Risk increases as these conditions result in weaker ownership structure. Besides that, evidence supports the view that a larger board size increases engagement in accrual-based earnings management. However, a negative relationship between larger board size and the Stock Price Crash Risk is found. This suggests that increased engagement in accrual-based earnings management causes a decrease in the Stock Price Crash Risk. All in all, these findings do not find a direct relationship of firms substituting the two earnings management methods and the effect on the Stock Price Crash Risk remains contrary to the belief that less engagement in earnings management leads to a greater Stock Price Crash Risk, which is very interesting. All in all, the cases of credit ratings, regulations, audit quality and conservatism show a relationship between substituting accrual-based for real earnings management leading to a decrease in the Stock Price Crash Risk. This relationship can be seen as the most significant finding of this thesis, where the trade-off theory causes the Stock Price Crash Risk to decrease. Although, this relationship does not hold for all examined elements. As
21
on the other hand, no evidence is found on the trade-off between both methods for the subsections disclosure of information, information asymmetry and ownership structure. For disclosure of information the Stock Price Crash Risk can both increase and decrease, while greater information asymmetry increases the Stock Price Crash Risk as management tends to engage more in both earnings management methods. Finally, evidence regarding ownership structure suggest that greater ownership structure leads to less engagement in earnings management overall, however, this seems to lead to an increase in the Stock Price Crash Risk. This relationship is not align with any other relationship found in this thesis or in general research. Therefore, I suggest more research should be done to more precisely determine the relationship between ownership structure and the Stock Price Crash Risk.
Dutch Summary/Nederlandse Samenvatting
In deze scriptie wordt het effect van de ‘’trade-off’’ theorie van Zang (2012) op de relatie tussen resultaatmanagement en ‘’Stock Price Crash Risk’’. Allereerst worden in het theoretisch kader resultatenmanagement, ‘’Stock Price Crash Risk’’ en de ‘’trade-off’’ theorie nader toegelicht. Vervolgens wordt het effect van de ‘’trade-off’’ theorie bepaald aan de hand van het analyseren van de volgende factoren: kredietbeoordeling, regelgeving, openbaarmaking van bedrijfsspecifieke informatie, voorzichtigheidsbeginsel, informatie asymmetrie, audit kwaliteit en ondernemingsstructuur. Uit de resultaten van deze analyse volgt dat in de gevallen van kredietbeoordeling, regelgeving, audit kwaliteit en het voorzichtigheidsbeginsel, de ‘’trade-off’’ theorie ervoor zorgt dat de ‘’Stock Price Crash Risk’’ daalt. Voor de factoren openbaarmaking van bedrijfsspecifieke informatie, informatie asymmetrie en ondernemingsstructuur is geen invloed gevonden van de ‘’trade-off’’ theorie op de relatie tussen resultaatmanagement en de ‘’Stock Price Crash Risk’’. Verder is er wel bevestigend bewijs gevonden voor de relatie tussen resultaten management en de ‘’Stock Price Crash Risk’’. Namelijk, hogere informatie asymmetrie leidt tot een stijging in de ‘’Stock Price Crash Risk’’. Daarnaast kan de ‘’Stock Price Crash Risk’’ zowel dalen als stijgen in het geval van openbaarmaking van bedrijfsspecifieke informatie. Ten laatste wordt er nieuw bewijs gevonden voor de factor ondernemingsstructuur. Volgens deze scriptie leidt een betere ondernemingsstructuur tot minder resultatenmanagement, dit zorgt echter voor een stijging in de ‘’Stock Price Crash Risk’’. Verder onderzoek is nodig om dit laatste bewijs te versterken of ontkrachten, aangezien er verder geen bewijs is voor deze gevonden relatie.
22
5. Reference list
Abed, D., Cutillas-Gomariz, M. F., Sánchez-Ballesta, J. P., & Yagüe, J. (2018). Real earnings management and information asymmetry in the equity market. European
Accounting Review, 27(2), 209-235.
Ali, S. M., Salleh, N. M., & Hassan, M. S. (2008). Ownership structure and earnings management in Malaysian listed companies: the size effect. Asian Journal of
Business and Accounting, 1(2), 89-116.
Alves, A. (2012). Ownership structure and earnings management: Evidence from Portugal. Australasian Accounting, Business and Finance Journal, 6(1), 57-74. Andreou, P. C., Antoniou, C., Horton, J., & Louca, C. (2016). Corporate governance and firm-specific stock price crashes. European Financial Management, 22, 916-956. Ayers, B. C., & Freeman, R. N. (2000). Why do large firms’ prices anticipate earnings earlier than small firms’ prices? Contemporary Accounting Research, 17, 191-212. Balsam, S., Bartov, E., & Marquardt, C. (2002). Accruals management, investor
sophistication, and equity valuation: Evidence from 10-Q filings. Journal of
Accounting Research, 40(4), 987-1012.
Banderlipe, M. R. (2009). The impact of selected corporate governance variables in mitigating earnings management in the Philippines. DLSU Business and Economics
Review, 19(1), 17-27.
Becker, C. L., DeFond, M. L., Jiambalvo, J., & Subramanyam, K. R. (1998). The effect of audit quality on earnings management. Contemporary Accounting Research, 15(1), 1-24.
Boubaker, S., Mansali, H., & Rjiba, H. (2014). Large controlling shareholders and stock price synchronicity. Journal of Banking and Finance, 40, 80-96.
Burnett, B., Cripe, B., Martin, G., & Mcallister, B. (2012). Audit quality and the trade-off between accretive stock repurchases and accrual-based earnings management. The Accounting Review, 87(6), 1861-1884.
Callen, F., & Fang, X. (2013). Institutional investor ability and crash risk: monitoring versus short-termism? Journal of Banking and Finance, 37, 3047-3063.
Cao, F., Ye, K., Zhang, N., & Li, S. (2018). Trade credit financing and stock price crash risk. Journal of International Financial Management and Accounting, 29(1), 30-56.
23
decisions. The Accounting Review, 84(4), 1085-1117.
Chapman, C. J. (2011). The effects of real earnings management on the firm, its competitors and subsequent reporting periods. Working paper.
Chen, C., Kim, J-B., & Yao, L. (2017). Earnings smoothing: Does it exacerbate or constrain stock price crash risk? Journal of Corporate Finance, 42, 36-54.
Chen, H., Ramnath, S., Rangan, S., & Rock, S. (2016). Inventory write-downs in the semiconductor sector. IIM Bangalore Research Paper, 524.
Cohen, D., Dey, A., & Lys, T. (2008). Real and Accrual-based earnings management in the pre and post-Sarbanes-Oxley periods. The Accounting Review, 82(3), 757-787. Collins, D. W., Kothari, S. P., & Rayburn, J. D. (1987). Firm size and the information content of prices with respect to earnings. Journal of Accounting and Economics,
9(2), 111-138.
DeAngelo, L. E. (1981). Auditor size and audit quality. Journal of Accounting and
Economics, 3, 183-199.
DeFond, M., Hung, M., Li, S., & Li, Y. (2015). Does mandatory IFRS adoption affect crash risk? The Accounting Review, 90(1), 265-299.
Deng, X., & Ong, S. E. (2018). Real earnings management, liquidity risk and REITs SEO dynamics. The Journal of Real Estate Finance and Economics, 56(3), 410-442. Doukakis, L. C. (2014). The effect of mandatory IFRS adoption on real and accrual-based earnings management activities. Journal of Accounting and Public Policy, 33(6), 551-572.
Fang Li, S., McDowell, E., & Moore, A. (2012). Accrual based earnings management, real transactions manipulation and expectations management: U.S. and international evidence.
Gao, J., Gao, B., & Wang, X. (2017). Trade-off between real activities earnings
management and accrual-based manipulation-evidence from China. Journal of
International Accounting, Auditing and Taxation, 29, 66-80.
Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40. 3-73. Guo, H., Li, B., & Zhang, J. (2018). Are real and accrual-based earnings management substitutes? DOI: 10.1016/j.adiac.2011.05.003.
Haggard, K. S., Martin, X., & Pereira. (2008). Does voluntary disclosure improve stock price informativeness? Financial Management, 37(4), 747-768.
24
Hamm, S. J. W., NG, J., & Li, E. E. (2012). Management earnings guidance and stock price crash risk. Paper presented at the Japan Accounting Review Conference, Kyoto, November 9.
Hribar, P., Jenkins, N. T., & Johnson, W. B. (2004). Stock repurchases as an earnings management device. Journal of Accounting and Economics, Forthcoming.
Huang, X., & Sun, L. (2017). Managerial ability and real earnings management. Advances
in Accounting, 37, 91-104.
Hutton, A., Marcus, A., & Tehranian, H. (2009). Opaque financial reports, R2, and crash
risk. Journal of Financial Economics, 94(1). 67-86.
Ipino, E., & Parbonetti, A. (2017). Mandatory IFRS adoption: the trade-off between accrual and real-based earnings management. Accounting and Business Research,
47(1), 91-121.
Iturriaga, F. J. L., & Hoffmann, P. S. (2005). Earnings management and internal
mechanisms of corporate governance: Empirical evidence from Chilean firms. Corporate Ownership and Control, 3(1), 17-29.
Jackson, S. B., & Lui, X. (2010). The allowance for uncollectible accounts, conservatism and earnings management. Journal of Accounting Research, 48(3), 565-601. Jin, L., & Myers, S. (2006). R2 around the world: New theory and new tests. Journal of
Financial Economics, 79(2). 257-92.
Kangarluei, S. J., & Hesar, B. S. (2012). Does conservatism in financial reporting affect earnings management: An evidence of Iran. African Journal of Business
Management, 6(21), 6439-6446.
Kao, L., & Chen, H. (2004). The effects of board characteristics on earnings management. Corporate Ownership and Control, 1(3), 96-107.
Khajavi, S., & Zare, A. (2016). The effect of audit quality on stock crash risk in Tehran stock exchange. International Journal of Economics and Financial Issues, 6(1), 20- 25.
Khalil, M., & Ozkan, A. (2016). Board independence, audit quality and earnings
management: Evidence from Egypt. Journal of Emerging Market Financing, 15(1), 84-118.
Khurana, I. K., Pereira, R., & Zhang, E. (2018). Is real earnings smoothing harmful? Evidence from firm-specific Stock Price Crash Risk. Contemporary accounting
