49 Pages Posted: 22 Jul 2011 Last revised: 31 Jul 2011
Date Written: June 22, 2011
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: 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