Evidence on the Trade-Off between Real Activities Manipulation and Accrual-Based Earnings Management
Hong Kong University of Science and Technology - Department of Accounting
June 22, 2011
Accounting Review, Forthcoming
I study whether managers use real activities manipulation and accrual-based earnings management as substitutes in managing earnings. I find that managers trade off the two earnings management methods based on their relative costs and that managers adjust the level of accrual-based earnings management according to the level of real activities manipulation realized. Using an empirical model that incorporates the costs associated with the two earnings management methods and captures managers’ sequential decisions, I document large sample evidence consistent with managers using real activities manipulation and accrual-based earnings management as substitutes.
Number of Pages in PDF File: 49
Keywords: real activities manipulation, accrual-based earnings management, trade-off
JEL Classification: K22, M41, M43
Date posted: July 22, 2011 ; Last revised: July 31, 2011
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