46 Pages Posted: 6 Feb 2007 Last revised: 3 Feb 2008
Date Written: March 1, 2007
I study whether managers use real and accrual manipulations as substitutes in managing earnings, and I study the order that managers make these decisions. I find that managers determine real manipulation before accrual manipulation. Based on this result, I use an empirical model that captures the sequentiality of real and accrual manipulations to test the tradeoffs between the two. The results of the broad sample tests are consistent with managers using real and accrual manipulations as substitutes. In a small sample test examining firms subject to securities class action lawsuits, I examine whether real and accrual manipulations change over time with changes in litigation risk. Consistent with managers using real and accrual manipulations as substitutes, I find that managers switch from accrual manipulation to real manipulation after lawsuit filings.
Keywords: Earnings management, real activities manipulation, accrual manipulation, litigation risk
JEL Classification: K22, M41, M43
Suggested Citation: Suggested Citation
By Ron Kasznik