An Empirical Assessment of Real Activities Manipulation Measures
Siriviriyakul, S. 2020. An Empirical Assessment of Real Activities Manipulation Measures. Journal of Financial Reporting, Forthcoming.
40 Pages Posted: 26 Nov 2013 Last revised: 22 Dec 2020
Date Written: December 21, 2020
I empirically assess the extent to which real earnings management metrics capture opportunistic behavior versus firms’ fundamental factors such as performance. For the traditional proxies proposed by Roychowdhury (2006), I find (1) the economic magnitude of the proxies to be high relative to two relevant benchmarks; (2) they exhibit persistence; and (3) they vary predictably with performance. These findings suggest that the traditional proxies likely capture opportunistic behavior but also likely reflect fundamental factors. I also examine several adjusted proxies based on refinements proposed by subsequent studies. I find that those proposed by Vorst (2016) and those based on Kothari, Mizik, and Roychowdhury (2016) seem to be the most effective at attenuating correlation with underlying fundamentals. Additional simulation tests on bias and power reveal that, between the two adjusted proxies, those based on Kothari et al.’s (2016) are generally more preferable.
Keywords: real activities manipulation; real earnings management; earnings manipulation; earnings benchmarks
JEL Classification: M41, M1
Suggested Citation: Suggested Citation