Evidence on the Tradeoff Between Real Manipulation and Accrual Manipulation

46 Pages Posted: 6 Feb 2007 Last revised: 3 Feb 2008

Amy Zang

Hong Kong University of Science and Technology - Department of Accounting

Date Written: March 1, 2007

Abstract

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

Zang, Amy, Evidence on the Tradeoff Between Real Manipulation and Accrual Manipulation (March 1, 2007). Available at SSRN: https://ssrn.com/abstract=961293 or http://dx.doi.org/10.2139/ssrn.961293

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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