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Mandatory IFRS adoption: the trade-off between accrual-based and real earnings management / Elisabetta Ipino & Antonio Parbonetti. // Accounting and Business Research Volume 47, 2017
2017.
p. 91-121.

This paper examines whether firms substituted real earnings management for accrual-based earnings management after the International Financial Reporting Standards (IFRS) became mandatory. Using a sample of 101,331 firm-year observations from 33 countries between 2000 and 2010, we show that IFRS adoption came with the unintended consequence of certain firms substituting real earnings management for accrual-based earnings management, especially among firms in countries with strict enforcement regimes. Furthermore, we document that the trade-off is confined to EU countries in which strong firm-level characteristics (i.e. the firm-level mechanism of control, the market’s level of scrutiny, and firm-specific incentives to provide transparency) are coupled with strong enforcement. We also show that IFRS had an effect in countries outside the EU, albeit at a different time. Overall, the results suggest that accounting regulators’ efforts to increase earnings quality might have had the unintended consequence of increasing real earnings management activities.
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Mandatory IFRS adoption: the trade-off between accrual-based and real earnings management/ Elisabetta Ipino, Antonio Parbonetti // Accounting and Business Research vol.47/2017
2017.
p. 91 -121.

This paper examines whether firms substituted real earnings management for accrual-based earnings management after the International Financial Reporting Standards (IFRS) became mandatory. Using a sample of 101,331 firm-year observations from 33 countries between 2000 and 2010, we show that IFRS adoption came with the unintended consequence of certain firms substituting real earnings management for accrual-based earnings management, especially among firms in countries with strict enforcement regimes. Furthermore, we document that the trade-off is confined to EU countries in which strong firm-level characteristics (i.e. the firm-level mechanism of control, the market’s level of scrutiny, and firm-specific incentives to provide transparency) are coupled with strong enforcement. We also show that IFRS had an effect in countries outside the EU, albeit at a different time. Overall, the results suggest that accounting regulators’ efforts to increase earnings quality might have had the unintended consequence of increasing real earnings management activities.
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The effect of financial leverage on real and accrual-based earnings management / Seraina C. Anagnostopoulou, Andrianos E. Tsekrekos // Accounting and Business Research Volume 47, 2017 - Issue 2
2017.
p. 191-236.

Past research has documented a substitution effect between real earnings management (RM) and accrual-based earnings management (AM), depending on relative costs. This study contributes to this research by examining whether levels of (and changes in) financial leverage have an impact on this empirically documented trade-off. We hypothesise that in the presence of high leverage, firms that engage in earnings manipulation tactics will exhibit a preference for RM due to a lower possibility – and subsequent costs – of getting caught. We show that leverage levels and increases positively and significantly affect upward RM, with no significant effect on income-increasing AM, while our findings point towards a complementarity effect between unexpected levels of RM and AM for firms with very high leverage levels and changes. This is interpreted as an indication that high leverage could attract heavy outsider scrutiny, making it necessary for firms to use both forms of earnings management in order to achieve earnings targets. Furthermore, we document that equity investors exhibit a significantly stronger penalising reaction to AM vs. RM, indicating that leverage-induced RM is not as easily detectable by market participants as debt-induced AM, despite the fact that the former could imply deviation from optimal business practices.
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The effect of financial leverage on real and accrual-based earnings management/ Seraina C. Anagnostopoulou, Andrianos E. Tsekrekos // Accounting and Business Research vol.47/2017
2017.
p.191 - 236.

Past research has documented a substitution effect between real earnings management (RM) and accrual-based earnings management (AM), depending on relative costs. This study contributes to this research by examining whether levels of (and changes in) financial leverage have an impact on this empirically documented trade-off. We hypothesise that in the presence of high leverage, firms that engage in earnings manipulation tactics will exhibit a preference for RM due to a lower possibility – and subsequent costs – of getting caught. We show that leverage levels and increases positively and significantly affect upward RM, with no significant effect on income-increasing AM, while our findings point towards a complementarity effect between unexpected levels of RM and AM for firms with very high leverage levels and changes. This is interpreted as an indication that high leverage could attract heavy outsider scrutiny, making it necessary for firms to use both forms of earnings management in order to achieve earnings targets. Furthermore, we document that equity investors exhibit a significantly stronger penalising reaction to AM vs. RM, indicating that leverage-induced RM is not as easily detectable by market participants as debt-induced AM, despite the fact that the former could imply deviation from optimal business practices.
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The role of corporate governance in shaping accruals manipulation prior to acquisitions / Nico Lehmann // Acounting and business research 2016, Vol46, N.3

p327-p364

Based on stock swap transactions involving public acquirers originating from the UK between 1998 and 2011, this paper investigates the role of corporate governance in shaping accruals manipulation prior to stock swap deals. In contrast to common claims that strong corporate governance constrains accruals manipulation, my results show that well-governed acquirers engage more aggressively in income-increasing accruals manipulation than those with weak governance. This finding is consistent with a role of corporate governance that incentivises managerial actions in the interests of firms’ shareholders. Overall, this finding highlights the setting-specific nature of the earnings management and corporate governance relation. My results are robust to different discretionary accrual models, differences in the firm s growth structure, merger and acquisition control variables, a control group of 100% cash acquirers, an analysis of buy-and-hold abnormal returns, and potential sample selection problems