|Re-examination of determinants of earnings management
|Hong Kong Polytechnic University -- Dissertations
Department of Accountancy
|vii, 61 leaves ; 30 cm
|Studies examining determinants of earnings management show that managers have incentives to manage discretionary accruals for bonus maximization or to avoid debt covenant violation. However, the discretionary accrual estimates used to indicate managers' earnings manipulation behavior in these studies ate criticized as having substantial measurement error. As a result, the findings of these studies become less convincing. The issue of measurement error in discretionary accrual models is widely discussed. The obvious weakness of the discretionary accrual models is their inability to incorporate the effect of business structural changes, which by the current models are incorrectly classified as discretionary accruals. Business structural changes are associated with the measurement error in the discretionary accrual models. The purpose of my study is to re-examine the determinants of earnings management using a refined model in which structural change variables are incorporated. The four variables representing structural changes mentioned in Hansen's study (1999) (i.e., discontinued operations, acquisitions, capital expenditures, and sales of property, plant and equipment) are used as control variables in this study. The results of my study show that only two of these structural change variables (capital expenditures and sales of property, plant and equipment) are significantly negative. It is different from Hansen's findings that all of them are significantly positive. Concerning the tests for the determinants of earnings management, the results show that discretionary accruals are significantly associated with executive remuneration and firms' debt ratios. Also, managers have different earnings management behavior depending on different levels of earnings. The findings are consistent with the existing relevant literature. Furthermore, the explanatory power of the refined model is greater than that of the model without such inclusion. It indicates that the refined model is an enhanced one. My study contributes to the earnings management literature by giving implications to researchers to incorporate the effect of structural changes in earnings management studies. To ensure the credit-worthiness of this study, this approach should be tested in different scenarios.
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