Background & Subject discussion: Financial reporting and earnings affect stakeholders’ decisions and is a vital component in firm’s information disclosure. Management possesses considerable influence over financial reports. Earnings consist of a cash-flow and accrual component. Earnings can be affected by managers’ judgment and decision either by accrual-based earnings management or real activities manipulation. Earnings management affects the relevance and reliability of financial reporting and is widely researched. Europe is consolidating and accounting and audit standards are harmonizing. Real activities manipulation is unobserved in Europe. Increased attention and regulations of earnings management are inducing more creative methods to alter earnings, such as stock repurchases. Purpose: The main purpose of this study is to investigate if real activities manipulation can be observed in Europe and to what extent in relationship to accrual-based activities to avoid reporting small losses. An underlying purpose is to study different methods of RAM, including some newer approaches to detect hypothesized RAM by stock repurchases. An additional purpose is to evaluate the different utilized detection methods to clarify effectiveness. The final purpose is to consider possible effects of EM on reliability and relevance of financial reporting. Conclusion: The result concludes that earnings management are performed by real activities manipulation. Stock repurchases, decreased discretionary expenses and production cost all indicate earnings management to avoid reporting earnings below a specific benchmark. The result questions the reliability and relevance of reported earnings.

This thesis investigates real earnings management behaviors in the context of open market share repurchase. I use three proxies developed by Roychowdhury (2006) to measure real earnings management behaviors, including abnormal cash flow from operations (DCFO), abnormal production costs (DPROD) and abnormal discretionary costs (DDISX). In comparison to existing literature that documents the impact of accrual earnings management on post-repurchase performance, this thesis endeavors in investigate thoroughly both methods of earnings management. I find that repurchasing firms not only engage in accrual earnings management as is documented in Gong, Louis and Sun (2008) but also engage in real earnings management. Empirically, repurchasing firms have significant positive DCFO and negative DPROD in the year of announcements, both of which are earnings-reducing real activities. Repurchasing firms do not exhibit significant evidence of earnings-reducing DDISX in the year of announcements, but they experience earnings-reducing DDISX in all the three years prior to announcements. As predicted, the operating performance and stock performance of a repurchasing firm can be explained by pre-announcement earnings-reducing accrual manipulations and pre-announcement earnings-decreasing real earnings management. Specifically, the pre-repurchase downward DPROD makes the most important explanatory variable in both repurchasing and actual repurchasing samples whether controlling for DACC or not. The pre-repurchase upward DCFO is most relevant in determining the post-repurchase stock performances. / published_or_final_version / Economics and Finance / Doctoral / Doctor of Philosophy

Thesis (Ph.D.)--Management, Georgia Institute of Technology, 2008. / Committee Chair: Church, Bryan; Committee Member: Comiskey, Eugene; Committee Member: Haizheng, Li; Committee Member: Kuang, Xi; Committee Member: Schneider, Arnold

Bakgrund och Problematisering: I och med att internationella redovisningsregler blev tvingande för europeiska börsbolag 2005 förändrades svensk redovisning. Vad gäller redovisningen av forskning och utvecklingskostnader öppnades för en större andel subjektiva bedömningar. Denna subjektivitet kan leda till att företagsledningar tar redovisningsbeslut för att genom de i näringslivet vanliga bonussystemen gynna sig själva, bedriver earnings management. Om detta är fallet innebär det att det kan ifrågasättas om bonussystemen fungerar som det är tänkt. Det är därför relevant att studera om företagsledningar verkligen använder forsknings och utvecklingskostnaderna för att bedriva earnings management. Syfte och frågeställning: Syftet är att undersöka om de möjligheter till subjektiva bedömningar som ges av IAS 38 leder till earnings management. Ur detta syfte kommer frågeställningen om hur det eventuella sambandet mellan incitament att bedriva earnings management och kostnaderna för forskning och utveckling. Metod: Studien har en kvantitativ metod med hypotetiskt deduktiv ansats. Ur agentteorin har hypoteser deducerats som prövas i en undersökning av redovisningsdata. Prövningen använder regressionsanalys för att godta hypoteserna. Slutsats: Studien visar på positivt samband mellan incitament att bedriva earnings management i form av big bath och income smoothing och kostnaderna för forskning och utveckling vilket innebär att företagsledningar synes utnyttja forsknings och utvecklingskostnaderna för att reglera resultatet.

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This research aims to explore and identify empirically the perceptions of Libyan Commercial Banks’ (LCBs) stakeholders about earnings management and its impact on the quality of financial reporting. The study examines the occurrence of earnings management and the techniques that are used to manage LCBs’ earnings by first investigating the understanding of LCBs’ stakeholders about the term earnings management. The study also examines perceptions of the motivations behind LCBs’ managers being engaged in earnings management, as well as the perceived conditions that enable LCBs’ managers to manage their earnings. Finally the study examines stakeholders’ perceptions about the controls by which earnings management may be mitigated. The results of the study are interpreted through an accountability perspective. The study uses semi-structured interviews and a questionnaire survey with wide groups of stakeholders’ LCBs. The findings of this study reveal a range of views regarding the quality of financial reporting between different stakeholders groups, and also within the individual groups. This finding may refer to a serious problem within the accountability relationship of the LCBs. The results findings also reveal that the term ‘earnings management’ is not understood consistently by different stakeholders in Libya. The findings also suggest the existence of earnings management in LCBs’ financial reporting using various techniques e.g. especially the loan loss provision. The motivations of earnings management practices as revealed by the study findings are consistent with those reported in the literature. Earnings management is perceived as an unethical practice by most of the LCBs’ stakeholders but there are exceptions to this view. Earnings management could be reduced, according to the perceptions of LCBs’ stakeholders, by adopting IFRS, applying better corporate governance, and enhancing the role of the external auditor.

There is international trend for the enterprises to develop to business groups. There are more and more large-sized or medium-sized business groups in Taiwan. However, the groups¡¦ diversification strategies often result in high risks. Especially the unrelated diversification. The Management has a motivation to do the earnings management when dealing with the non-core business. If the earnings quality is manipulated by the management, it will cause the investors to ignore the risk which diversification strategy will bring. So far, there is no research about the the impact of earnings management on medium-sized business group. The purpose of this research is to examine whether medium-sized business groups¡¦ management has a motivation to make earnings management. The results show that¡G 1. There are no direct relationships between related diversification, unrelated diversification and earnings management. It is considered that medium-sized group business probably be family enterprises with centralized shareholding. The management doesn¡¦t have strong intention to make earnings management. 2. Debt/Equity has positive correlation on earnings management. The creditor often has restriction to minimum working capital and highest-level liability ratio of the borrower. The management has a motivation to choose appropriate accounting principle to correspond with the each given financial ratio.

This thesis investigates whether firms use real activities manipulation for income-decreasing earnings management purposes. Managers can use different tools to manage earnings. Given that managers have the authority to apply their own judgment in the preparation of financial reports and to make decision about business activities of their incumbent companies, the opportunity to manipulate earnings is twofold: the first is to manipulate financial reports using accounting techniques and the second is to manipulate underlying transactions. After the introduction of new regulations that were meant to restrict accounting choice as a response to high-profile accounting scandals at the turn of the century, there has been growing literature on the use of real activities manipulation for earnings management. While more control over financial reporting can potentially reduce earnings management through accounting choice, as real activities manipulation concerns non-accounting decisions of management, tighter accounting standards are not able to restrict manipulation of activities. This shift toward real activities manipulation is supported by empirical evidence. Whilst prior studies indicate that managers have incentives for both income-increasing and income-decreasing earnings management, the overwhelming majority of authors have concentrated on income-increasing attempts. However, one would expect that real activities manipulation would also be used for income-decreasing purposes. This study links two lines of research in the area of earnings management; downward earnings management and earnings management through real activities manipulation. Using a large sample of US firms for the period 2002-2011, the present thesis examines whether and how real activities manipulation is used for income-decreasing earnings management. To this end, firms that substantially outperformed their last year performance, or suspect firms, which are considered as more likely to exhibit income-decreasing earnings management are compared with the rest of the sample in terms of various measures of real activities manipulation. The results indicate that firms with extra earnings by the end of third quarter of fiscal year manage earnings downward by means of real activities including sales, production and discretionary expenses. The results are generally robust to a number of sensitivity tests.

This thesis presents two essays on real earnings management and future performance. The first essay draws on empirical studies that examine the three types of real earnings management activities in the United Kingdom (UK) for firms that are more likely to manipulate their earnings to avoid missing earnings targets. These targets include the zero earnings, and last year’s earnings. Also drawing from empirical studies, the second essay investigates the impact of real earnings management on firms’ future operating performance in the UK. In the first essay, I examine earnings management through real activities manipulation by using a sample of UK firms over the period 2009-2013. According to the transaction cost theory and opportunistic perspective of earnings management, the results of the first essay reveal that managers in UK suspect firm-years that manage earnings upward utilise more real earnings management activities to achieve earnings benchmarks opportunistically. Specifically, I find that (1) firms which manage upward earnings have unusually low cash flows from operations by offering price discounts or/and more lenient credit terms to increase sales; (2) firms that manage upward earnings have unusually low discretionary expenditures by cutting/reducing expenditures spending to improve reported margin and (3) firms which manage upward earnings, incur unusually high production costs by producing more products to report lower costs of goods sold in order to achieve their targets. Further, I find evidence that UK firms’ meeting/beating earnings benchmarks around zero earnings and last year’s earnings engage in sales-based manipulation and reducing/cutting discretionary expenses simultaneously; they also engage in overproducing products and reducing discretionary expenses at the same time. Furthermore, I do not find, however, evidence that managers in UK firms are associated with high real earnings management through sales-based manipulation to meet/beat last year’s earnings. On the other hand, I find evidence that manager in UK firms engage in income-increasing earnings management through accounting choice (e.g., accrual-based earnings management) to meet an earnings target. Motivated by agency conflicts of real earnings management (e.g., opportunistic and signalling perspectives), the second essay investigates whether there is an association between UK firms that manipulate their business operations to meet earnings benchmarks (e.g., zero earnings, last year’s earnings) and subsequent operating performance. I implement Fama and MacBeth’s (1973) regression analysis to examine the effects of the magnitude of real earnings management on firms’ future performance. Empirical test results show that manipulation of operating activities such as sales, discretionary expenditures, and production costs to meet earnings benchmarks has a significant positive consequence for firms’ subsequent operating performance and signals firms’ good future performance. Further, I find evidence that firms that manipulate their operating activities in the absence of meeting/beating earnings benchmarks experience a decline in their subsequent operating performance. The findings of this research lend support to our understanding of the process that management follows to evaluate costs and benefits of real earnings management.

Sustainability is becoming a more important topic, not just in terms of the environment but also through social and governmental aspects. There are different views on what responsibility firms should take and what their incentives might be. Companies get more pressure from society to perform activities related to Corporate Social Responsibility (CSR) and not just focus on maximizing wealth for their shareholders. Thus, creates incentives to manipulate their earnings, either by managing their accruals (AEM) or by performing real activity earnings management (REM), to please all parties. On the other hand, firms who already manipulate their earnings have motives to increase their participation in CSR activities as a cover to hide their performance of Earnings Management (EM). There are plenty of previous studies investigating the relationships between CSR and EM, but with contradicting results. Some have tested a one-way relationship while others have evaluated a bi-directional relationship. This thesis has provided evidence that there exists a relationship between CSR and EM, where AEM (REM) has a negative (positive) effect on CSR while CSR has a negative (positive) effect on AEM (REM). Also, there is a significant difference between their effects in both directions of the relationship. Thereby, the proposed research question is answered: ‘’What are the relationships between Corporate Social Responsibility and Earnings Management?’’. Firms who are highly engaged in CSR care about all of their stakeholders and they are ethical, therefore they manipulate their accruals less. But they can also have increased agency issues and therefore they perform more real activity earnings management. From the other perspective, firms who engage in accrual-based earnings management are likely to have an overconfident CEO who wants to send out the right signals but does not feel the need to hide their actions behind CSR activities. Moreover, the managers that execute real activity earnings management might feel the need to not get detected and therefore they hide their manipulations behind CSR activities. These findings are both aligned and contradicting several theories depending on what direction of the relationship one is looking at. However, the legitimacy theory has been found to have a large impact in both directions of the relationship, all companies feel the urge to either be legitimate, or appear as it. This is a quantitative cross-sectional study including 5.026 observations from European companies. The authors are aligned with the positivist paradigm and the study takes a deductive approach. The statistically significant results from OLS regression with fixed effects are backed up and compared to theories and previous studies within the area.