Analysis of Earnings Management - Annotated Bibliography Example

ANNOTATED BIBLIOGRAPHY IN EARNINGS MANAGEMENT Introduction Earnings management is an important and fundamental aspect in the world of finance and accounting. Basically, earning management is a process through which the directors of a firm will want to present financial statements based on pre-determined targets. Since these targets guide these directors, they tend to find ways and means of putting together creative accounting techniques to present accounts and financial statements that seem to show that the targets of the period has been met. The main areas of contention in earnings management include: 1. The problem with the presentation of falsified figures 2. A problem of misleading results that can lead to the collapse of organizations as the case was with the Enron and Worldcom scandals 3. The use of creating accounting techniques that causes stakeholders to make wrong decisions 4. The overlooking of accounting standards and the choice of favorable accounting techniques that helps directors to meet their ends and expectations. This annotated bibliography will look at scholarly sources and books that provides information and insights into the practice of earnings management. This will provide important information and guidance about scholarly sources relating to earning management. The Effect of Firm Size on Earnings Management (Kim, Liu, & Rhee, 2012) This journal article examines the relationship between firm size and earnings management. To this end, the article is based on an empirical study into small and large organizations to identify which organizations are more prone to earnings management. The study indicates that both large and small organizations undertake earnings management to avoid presenting negative results. The study shows that most small firms undertake earnings management to avoid reporting losses. On the other hand, larger and medium sized organizations use aggressive earning management to avoid profit decreases than smaller firms. Abusive Earnings Management and Early Warning Signs (Magrath & Weld, 2012) The journal involves a study of the relationship between earnings management and accounting standards. It identifies that earnings management are increasingly done in areas where organizations and business are allowed to pass judgments. These areas are increasingly being regulated by accounting standards. However firms continue to use methods of overriding accounting standards because most of these elements and aspects of earnings management causes firms to incur serious losses. Corporate Governance and Pay-For-Performance: The Impact of Earnings Management (Cornett, Marcus, & Tehranian, 2008) Fundamentally, this journal examines the relationship between earnings management and corporate governance. It answers the question of which practices of earnings management affects earnings management and how. The study critically evaluates 100 S&P firms and their accounting practices and auditing trends between 1994 and 2003. The study identifies that in organizations where there is a strong presence of institutional investors, earnings management are minimal because there is control and care that is induced in the affairs of the firm. However, where there are many individual shareholders, earnings management is common. Earnings Management through Real Activity Manipulation (Roychowdhury, 2006) This study involved an examination of elements of managers’ manipulation of specific activities to avoid reporting losses and overstating profits. Evidence from the study shows that increases in sales, overproduction to report lower costs of goods sold and reduction in discretionary expenditures are used to attain the end of earnings management. The study was done through the use of cross-sectional analysis on activities in a sample of corporate entities. Minor factors that influence earnings management include the reduction of industry figures, modification of stock inventories and receivables. Detecting Earnings Management: A New Approach (Dechow, Hutton, Kim, & Sloan, 2012) The writers of this article sought to use a logical approach to detect earnings management in financial statements where accrual accounting is utilized. To this end, they rely on the basic assumption that in accruals accounting, transactions entered in one period must be reversed in the next. Hence, the use of this technique can be employed to check transactions that are not reverse properly in subsequent periods. The empirical application of this study shows that it increases the probability of detecting earnings management by up to 40% of the normal possibility. Earnings Management and Firm Size: An Empirical Analysis of the Albanian Markets (Llukani, 2013) The study sought to apply the principles and practices of detecting earnings management to a smaller economy that is classified as part of the developing world. The study shows that earnings management also occurs in the developing world and in smaller countries. However, there are no significant differences between the practice in small and larger firms as they seem to have similar approaches and traditions in carrying out earnings management. This is in contrast with companies in the developed world where the practice varies between smaller firms and larger firms. Does Earning Management affect Firms’ Investment Decisions? (McNichols & Stubben, 2008) The journal article reviews whether earnings management leads to suboptimal investment decisions or not. The study includes the examination of fixed asset acquisition decisions in US public companies between 1978 and 2002. The study concludes that when earnings management is detected in firms, the firms are hesitant to invest in fixed assets. This leads to less spending as a system of correcting the overstatements in the previous period. It is therefore conclusive from this journal article that earnings management affects the internal decision making adversely. Ownership Structure and Earnings Management: Evidence from Portugal (Alves, 2012) In the preliminary research for this paper, it was identified that most large companies in Portugal are owned by institutional shareholders who wield a lot of influence. With this influence, they are able to set targets and limits for companies which induce earnings management in Portugal. The second part of the study conducts an enquiry into the relationship between concentration of ownership and earnings management. The study shows that in firms in Portugal where there is a higher concentration of ownership, earnings management is less common. Earnings Management and Corporate Social Responsibility (Prior, Surroca, & Tribo, 2007) The study hypothesizes that earnings management is related to stakeholder needs and expectations. Hence, managers resort to earnings management to deal with shareholder requirements and compensate other stakeholders through corporate social responsibility. The empirical study proves that the main motivation for earnings management is shareholder requirements and expectations. And managers engage in earnings management to please shareholders. It is also proven that there is a positive relationship between corporate social relationships and stakeholder needs in periods where earnings management occurs. Discussion of Detecting Earnings Management: A New Approach (Gerakos, 2012). This is a theoretical review of the concept of earnings management. To this end, the paper examines the basic elements and structures of earnings management and how it evolved from the 1970s. This indicates that the practice changes as and when accounting practices become tougher. This is because it is an end managers seek to attain. However, the use of objective accounting standards enables the accounting community to deal with earnings management. Earnings management using asset sales: Interesting issues for further study under unique institutional settings (Wang, Tung, Chen-Chang, Lan Fen, & Chiung-Hui, 2010). This journal examines the relationship between earnings management and long-lived assets. The paper identifies that earnings management is unavoidable in dealing with some long-term assets like bonds. Hence, there is the need for the presentation of a reasonable scope to define the extent to which firms can exercise their right of flexing these assets that have an inherent tendency that allows earnings management. The journal gives room for further research into these assets and a continuous adjustment of these rules. Economic Effects of Tightening Accounting Standards to Restrict Earnings Management (Ewert & Wagenhofer, 2005) This paper sought to examine the effect and impacts of presenting newer and stronger accounting standards to get rid of earnings management. The paper distinguishes between accounting earnings management and real earnings management. They writers identify that real earnings management is something that cannot be detected or dealt-with by accounting standards. Rather, accounting earnings management is what can be controlled by these new standards. The paper recommends that firms should use various techniques like promoting proper governance and monitoring in order to prevent earnings management and its abuse in organizations. Overvaluation and the Choice of Alternative Earnings Management Mechanisms (Badertscher, 2011) The paper examines the relationship between the degree of overvaluation and duration on the management’s choice of alternative accounting standards. In this study, it is identified that earnings management in one period induces a firm’s management to choose a method of valuation and recording financial information that is tantamount to earnings management in the next period. Hence, there is a trend towards induction of earnings management from one period to another. The study also finds that the longer a firm continues with earnings management, the more devastating the effect is when it is discovered. Earnings Management Strategies and the Trade-off between Tax Benefits and Detection Risk: To Conform or Not to Conform? (Badertscher, Phillips, Pincus, & Rego, 2009) This study examines the relationship between earnings management as it is carried out before and after tax payment. It is identified that earnings management is induced to reduce profits before tax in order to pay less taxes. On the other hand, earnings management is applied to sometimes overstate profits after tax is deducted. This is done through carryforwards and other methods that relates to the cut-off options available. Evidence on the Trade-Off between Real Activities Manipulation and Accrual-Based Earnings Management (Zang, 2012) The study examines how managers manipulate accounts in earnings management. It classified earnings management into real activities manipulations and this involves the wrong recording of activities or indulgence in activities that distort the true and fair view of accounts. On the other hand, accruals-based earnings management involves the use of accounting techniques to provide favorable financial accounts that meet objectives of the managers. Evidence show that managers choose the most appropriate approach based on the circumstances and costs they will avoid in the process. Earnings Management and Cultural Values (Desender, E., & Escamilla de León, 2011) In this study, the authors examined earnings management from the context of culture. To this end, they use various concepts of cultural dimensions including Hofstede’s scale and Schwartz’s model. The study shows that formal investor protection requirements influence the attitude of managers and this causes them to undertake earnings management. The extent and scope of earnings management varies across cultures around the world. This involves the cultural values that influence the majority of managers and directors. Another indirect cultural component is that corporate governance traditions are influenced by cultural practices and this shapes the way in which earnings management can be detected or accepted in the society. Financial Reporting Transparency and Earnings Management (Hunton, Libby, & Mazza, 2006) The study examines the importance of comprehensive income reporting as a means for reducing and avoiding earnings management. 62 firms are reviewed in the research and this culminates in a conclusion that requirement firms to provide more detailed and more comprehensive financial information allows the corporate governance teams of organizations to identify issues of earnings management and deal with them. Earnings Management and Investors’ Stock Return (Shih-Wei, Fengyi, & Wenchang, 2012) The study identifies the main pointers and elements through which earnings management can be traced. The authors noted that in most cases, the most popular ends that is sought by the preparers of financial statements are the most popular reference point through which earnings management can be investigated. The main pointers include earnings before interest and tax, earnings after interest and tax and earnings per share. These are often tampered with through earnings management and investigations of this nature must start from this reference point. Real and Accruals-Based Earning Management in the Pre-and Post-Sarbanes-Oxley Periods (Cohen, Dey, & Lys, 2008) Evidence gathered in this study showed that earnings management increased steadily from 1987 until the Sarbanes-Oxley Act was introduced. The study shows that accounting and accruals-based earnings management was common in the period between 1987 and 2002 when Sarbanes-Oxley came to force. However, since Sarbanes-Oxley effectively criminalized accruals based earnings management, there was a sharp increase in real and activity-based earnings management. This is because such issues were not covered under the scope of the SOX rules and arrangements. An Analysis of Managerial Use and Market Consequences of Earnings Management and Expectation Management (Das & Kim, 2011) This journal was a practical examination of the relationship between earnings management and expectations management. The research shows that there is a strong relationship between the two. Managers seek to use earnings management to attain the earning expectations, primarily of shareholders because these standards guide the conduct and ways through which they set their targets. This culminates in earning management standards that are applied in a given period. Insider Trading and Earnings Management (Issaevitch, 2008) This research examines the relationship between insider trading and earnings management. It identifies that the infinite-model of earnings management decreases investor informedness for regulatory stringency below a threshold value. Three Essays on Earnings Management using Real Business Operations (Li, 2012) This research examines country-level laws and regulations towards earnings management and firm-specific stock price behavior. The study shows that the expectations and targets set for managers are based on stock price consistency and this causes managers to inflate earnings. They often work within the laws of the country but this is sometimes blown out of proportion in some cases. The Effect of Income-Increasing Earnings Management on Analysts Responses (Sankara, 2012) This research examines the relationship between financial intermediaries/analysts’ motivations and interests and the interest of managers in organizations. The findings indicate that financial analysts often do what is within the generally accepted knowledge to examine the controls for earnings quality. If it is satisfactory, they conclude on the value and worth of stocks. This might not be thorough or robust enough but that is the best way to ensure that stock prices are fixed with little interference from earnings management practices. Essays on Real Earnings Management (Chapman, 2008) This paper examines the competitive inducers that cause firms to take part in real earnings management. This involves the use of expenditures relating to marketing and attaining competitive advantage and how it features in the earnings management process. The research indicates that earnings management is often induced by issues like competitive strategies and marketing strategies. This is because marketing is a grey area that can be flexed in the period. Hence, this provides an avenue where earnings management is often carried out. Consequences of real earnings management and weak corporate governance: Evidence from cash holdings (Greiner, 2013) This study involves the examination of the relationship between earnings management and cash holdings. The amount of cash being held by a firm is mainly an important and significant aspect of the running of a firm or an organization and it forms an area for manipulation and real earnings management. In order to control the manipulation of cash reserves, the researcher recommends that there must be an inquest into the valuation methods as well as the incorporation of agency problems in the firm’s activities. Bibliography Alves, S. (2012). Ownership Structure and Earnings Management: Evidence from Portugal. Australasian Accounting Business and Finance Journal , 57-74. Badertscher, B. A. (2011). Overvaluation and the Choice of Alternative Earnings Management Mechanisms. The Accounting Review , 1491-1518. Badertscher, B. A., Phillips, J. D., Pincus, M., & Rego, S. O. (2009). Earnings Management Strategies and the Trade-off between Tax Benefits and Detection Risk: To Conform or Not to Conform? . The Accounting Review , 63-97. Chapman, C. J. (2008). Essays on Real Earnings Management. Harvard University , 1-171. Cohen, D. A., Dey, A., & Lys, T. Z. (2008). Real and Accruals-Based Earning Management in the Pre-and Post-Sarbanes-Oxley Periods. The Accounting Review , 757-787. Cornett, M. M., Marcus, A. J., & Tehranian, H. (2008). Corporate Governance and Pay-For-Performance: The Impact of Earnings Management. Journal of Financial Economics , 357-373. Das, S., & Kim, K. a. (2011). An Analysis of Managerial Use and Market Consequences of Earnings Mangement and Expectation Management. The Accounting Review Vol. 86, No. 6 , 1935-1967. Dechow, P. M., Hutton, A. P., Kim, J. H., & Sloan, R. G. (2012). Detecting Earnings Management: A New Approach. Journal of Accounting Research , 275-334. Dechow, P. M., Hutton, A. P., Kim, J. K., & Sloan, R. G. (2012). Detecting Earnings Management: A New Approach . Journal of Accounting Research Vol. 50, No. 2, Current Topics in Accounting Research , 275-334. Desender, K. A., E., C. C., & Escamilla de León, S. A. (2011). Earnings Management and Cultural Values. The American Journal of Economics and Sociology , 639-670. Ewert, R., & Wagenhofer, A. (2005). Economic Effects of Tightening Accounting Standards to Restrict Earnings Management. The Accounting Review , 1101-1124. Gerakos, J. (2012). Discussion of Detecting Earnings Management: A New Approach. Journal of Accounting Research , 1-13. Greiner, A. J. (2013). Consequences of real earnings management and weak corporate governance: Evidence from cash holdings. Florida Atlantic University , 1-115. Hunton, J. E., Libby, R., & Mazza, C. L. (2006). Financial Reporting Transparency and Earnings Management. The Accounting Review , 135-157. Issaevitch, T. A. (2008). Insider trading and earnings management . Dissertation - Columbia University , 1-114. Kim, Y., Liu, C., & Rhee, S. G. (2012). The Effect of Firm Size on Earnings Management. Journal of Accounting and Economics , 452-489. Li, L. (2012). Three essays on earnings management using real business operations. Rensselaer Polytechnic Institute , 1-201. Llukani, T. (2013). Earnings Management and Firm Size: An Empirical Analysis of the Albanian Markets. European Scientific Journal , 135-143. Magrath, L., & Weld, L. G. (2012). Abusive Earnings Management and Early Warning Signs. CPA Journal , 251-258. McNichols, M. F., & Stubben, S. R. (2008). Does Earning Management affect Firms’ Investment Decisions. The Accounting Review , 1571-1603. Prior, D., Surroca, J., & Tribo, J. A. (2007). Earnings Management and Corporate Social Responsibility. Universidad Carlo III De Madrid , 1-42. Roychowdhury, S. (2006). Earnings Management through Real Activity Manipulation. Journal of Accounting and Economics , 335-370. Sankara, J. (2012). The effect of income-increasing earnings management on analysts responses. Florida Atlantic University , 1-202. Shih-Wei, W., Fengyi, L., & Wenchang, F. (2012). Earnings Management and Investors Stock Return. Emerging Markets Finance & Trade Vol. 48 , 129-140. Wang, C. S., Tung, S., Chen-Chang, L., Lan Fen, W., & Chiung-Hui. (2010). Earnings management using asset sales: Interesting issues for further study under unique institutional settings. International Journal of Accounting and Information Management , 237-251. Zang, A. Y. (2012). Evidence on the Trade-Off between Real Activities Manipulation and Accrual-Based Earnings Management. The Accounting Review , 675-703. Read More