Accrual-Based and Real Earnings Management: An International Comparison for Investor Protection

Journal of Contemporary Accounting and Economics, Forthcoming

40 Pages Posted: 27 May 2012 Last revised: 10 May 2015

Masahiro Enomoto

Kobe University - Research Institute for Economics & Business Administration

Fumihiko Kimura

Tohoku University - Economics & Management

Tomoyasu Yamaguchi

Tohoku Gakuin University - Faculty of Business Administration

Date Written: May 10, 2015

Abstract

This paper examines the differences in accrual-based and real earnings management across countries from the perspective of investor protection. Following prior research (Leuz et al., 2003), we hypothesize that accrual-based earnings management is more constrained by strict discipline in countries with stronger investor protection. For real earnings management in countries with stronger investor protection, we have two hypotheses. One is that real earnings management is more often implemented to substitute for accrual-based earnings management. The other is that real earnings management is less often implemented, as with accrual-based earnings management. Our examination uses data from 222,513 firm-year observations drawn from 38 countries covering 1991 to 2010. The results show that managers in countries with stronger investor protection tend to engage in real earnings management instead of accrual-based earnings management. We also find that real earnings management is constrained by analyst following. Our results are not affected by the control of audit quality or the calculation method used for earnings management measures according to country and year.

Keywords: corporate governance, corporation and securities law, accounting, government policy and regulation

JEL Classification: G34, K22, M41, G38

Suggested Citation

Enomoto, Masahiro and Kimura, Fumihiko and Yamaguchi, Tomoyasu, Accrual-Based and Real Earnings Management: An International Comparison for Investor Protection (May 10, 2015). Journal of Contemporary Accounting and Economics, Forthcoming . Available at SSRN: https://ssrn.com/abstract=2066797 or http://dx.doi.org/10.2139/ssrn.2066797

Masahiro Enomoto (Contact Author)

Kobe University - Research Institute for Economics & Business Administration ( email )

2-1, Rokkodai cho
Nada-ku
Kobe, 657-8501
Japan

Fumihiko Kimura

Tohoku University - Economics & Management ( email )

2-1-1 Katahira
Aoba-ku
Sendai, Miyagi 980-8577
Japan

Tomoyasu Yamaguchi

Tohoku Gakuin University - Faculty of Business Administration ( email )

1-3-1 Tsuchitoi Aoba-ku
Sendai, 980-8511
Japan

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