Research Discussion Papers, Bank of Finland
No 13/2015:
Evidence for the Existence of Downward Real Earnings Management
Bill Francis ()
, Iftekhar Hasan ()
and Lingxiang Li ()
Abstract: Prior studies of real-activity earnings management (REM)
focus on earnings-inflating abnormal activities. We seek to establish the
existence of downward REM by investigating several corporate events in
which managers have incentives to temporarily deflate market valuations.
Specifically, we focus on, and find downward REM before, share repurchases,
management buyouts (MBOs), and CEO option awards. Large-sample evidence of
downward REM is also found in our general analysis of earnings smoothing.
Downward REM becomes much smaller or nonexistent when there is a lack of
managerial incentives in those events, such as non-carry-through
repurchases, incomplete MBOs, and unexpected option awards. Following the
research design of Zang (2012), we find that various REM and AEM cost
factors consistently influence the magnitude of downward REM and AEM around
the three corporate events.
Keywords: downward earnings management; real earnings management; share repurchase; management buyout; CEO option grant; earnings smoothing; (follow links to similar papers)
JEL-Codes: G14; G30; G32; M40; M41; (follow links to similar papers)
59 pages, August 12, 2015
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- This paper is forthcoming as:
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Francis, Bill, Iftekhar Hasan and Lingxiang Li, 'Evidence for the Existence of Downward Real Earnings Management', Journal of Auditing, Accounting and Finance.
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