The impact of abnormal real earnings management to meet earnings benchmarks on future operating performance

Basiem Al-Shattarat, Khaled Hussainey, Wasim Al-Shattarat

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Abstract

Motivated by agency conflicts of real earnings management (e.g., opportunistic and signalling perspectives), this study investigates the association between firms that manipulate their business operations to meet earnings benchmarks (i.e., zero earnings, last year’s earnings) and subsequent operating performance. We examine the effects of the magnitude of real earnings management on firms’ future performance for the period 2009 to 2015 for UK firms. Our analysis shows that the manipulation of operating activities such as sales, discretionary expenditures, and production costs to meet earnings benchmarks has a significantly positive consequence for firms’ subsequent operating performance and signals firms’ good future performance. We also find that firms that manipulate their operating activities in the absence of meeting earnings benchmarks experience a decline in their subsequent operating performance. The findings of this research lend support to our understanding of the process that management follows to evaluate costs and benefits of real earnings management.
Original languageEnglish
JournalInternational Review of Financial Analysis
Early online date5 Oct 2018
DOIs
Publication statusEarly online - 5 Oct 2018

Keywords

  • Earnings benchmarks
  • Future performance
  • Opportunistic perspective
  • Real earnings management
  • Signalling perspective

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