Article2020

Potential Substitution Between Accrual Earnings Management and Real Earnings Management Among Pakistani Listed Firms

Syed Farhan Shah · Abdul Rashid · Wasim Shahid Malik

13 citations0/0 files storedGlobal Business Review

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Auditing, Earnings Management, Governance Accounting and Organizational Management Corporate Governance and Financial Management

Abstract

This article empirically explores the association between accrual earnings management (AEM) and real earnings management (REM) using a sample of 150 non-financial listed firms for the period 2008–2017. The AEM is measured through the original Jones model (1991) and Dechow et al. (1995) model, whereas REM is measured through Roychowdhury’s (2006) model. For empirical analysis, the study estimates simultaneous equations by using ordinary least square (OLS) and the two-stage least square techniques (2SLS). The result of the analysis indicates that there is a negative and significant relationship between AEM and REM, suggesting that Pakistani listed firms employ AEM and REM as a substitute to achieve earnings targets. The results of the study are valuable for auditors and regulators to contemplate, govern and legalize suitable guidelines to enhance the transparency in the financial reporting quality.

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References

1991Earnings Management During Import Relief Investigations 2005Performance matched discretionary accrual measures 2005The economic implications of corporate financial reporting 2003Earnings Management through Real Activities Manipulation 1999A Review of the Earnings Management Literature and Its Implications for Standard Setting 2008Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes-Oxley Periods 1999Earnings Management to Exceed Thresholds 2008Accrual-Based and Real Earnings Management Activities Around Seasoned Equity Offerings

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