Real Earnings Management and Subsequent Operating Performance

Real Earnings Management (REM) is the manipulation of business activities to meet an earning's threshold. Despite concern that REM activities create real economic costs, research on the relation between REM and subsequent operating performance is inconclusive. In this paper, a two-firm-level me...

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Bibliographic Details
Published in:ICFAI journal of operations management 2016-11, Vol.15 (4), p.7-7
Main Authors: Leggett, Denise M, Parsons, Linda M, Reitenga, Austin L
Format: Article
Language:English
Subjects:
Accruals
Business
Earnings management
Earnings per share
Economic impact
Estimates
Estimating
Expenditures
Fixed assets
Hypotheses
Inventory
Management
Net losses
Profits
Studies
Thresholds
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Summary:Real Earnings Management (REM) is the manipulation of business activities to meet an earning's threshold. Despite concern that REM activities create real economic costs, research on the relation between REM and subsequent operating performance is inconclusive. In this paper, a two-firm-level method of estimating abnormal discretionary expenditures is developed and a more proactive method of identifying REM activity is implemented. Using firm-level estimates of abnormal expenditures, strong evidence of REM negatively related to subsequent period return on assets and cash flows from operations is found. The results suggest that the inconclusive results in prior research may be in part due to estimating abnormal expenditures using industry-level models.
ISSN:0972-6888