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Evidence on the Trade-Off between Real Activities Manipulation and Accrual-Based Earnings Management

49 Pages Posted: 22 Jul 2011 Last revised: 31 Jul 2011

Amy Zang

Hong Kong University of Science and Technology - Department of Accounting

Date Written: June 22, 2011

Abstract

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.

Keywords: real activities manipulation, accrual-based earnings management, trade-off

JEL Classification: K22, M41, M43

Suggested Citation

Zang, Amy, Evidence on the Trade-Off between Real Activities Manipulation and Accrual-Based Earnings Management (June 22, 2011). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1891759

Amy Zang (Contact Author)

Hong Kong University of Science and Technology - Department of Accounting ( email )

LSK Business School Building
Clear Water Bay, Kowloon
Hong Kong
+852-2358-7561 (Phone)

HOME PAGE: http://www.AmyZang.org

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