Goal-Oriented Earnings Management: Evidence from Taiwanese Firms

Abstract

Using Benford's (1938) law, this study documents pervasive evidence that managers of publicly listed Taiwanese firms tend to engage in earnings manipulative activities, rounding earnings numbers to achieve key reference points. Consistent with prior studies on rounding behavior in other countries and regions, we find that the management of Taiwanese firms often emphasizes the first digit of earnings numbers. We also find that key reference points are not limited to the first digit; the second, third, or even fourth digits are sometimes used as the reference points of rounding earnings behavior. Finally, our empirical results show that the incentives to round earnings numbers are negatively associated with the distance of prerounded earnings to the next reference point. In other words, the closer the prerounded earnings are to the reference point, the more likely managers are to round earnings. The findings of the study have important implications for banks in implementing lending policies and for external auditors in designing audit procedures.

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