Received: May 15, 2022 Review: September 8, 2022 Accepted: Nov. 28, 2022
https://doi.org/10.53908/NMMR.300501
Volume 30, Issue-5, October 2022
Abstract:
Purpose: The main objective of the study is to examine the impact of the equity listing process on the choice of earnings management practices among new issue firms.
Design/Methodology: The study has used a unique sample of new issue firms listed on Indian and Chinese stock markets during the period 2007-2019 and investigated whether the difference in the listing process of these two markets affects the choice of earnings management practices. To empirically test the models, the study has used the two-stage least square regression method (2SLS).
Findings: : The findings of the study show that the approval-based listing process in China motivates the new issue firms to substitute accruals with real earnings management. However, the registration-based listing process in India encourages the new issue firms to adopt both accrual and real earnings management practices as complements in their strategic decision-making
Originality: The present study contributes to the literature by examining how the difference in the listing process of a country affects managers’ choice of EM practices in new issue firms which have not been covered in earlier studies
Practical implications: The findings of the study provide insights to analysts, prospective investors, and regulators to correctly evaluate the new issue firms.
Keywords: Earnings management, initial public offering (IPO), accrual earnings management, real earnings management, emerging economies
References
Alhadab, M., Clacher, I. and Keasey, K. (2016), “A Comparative analysis of real and accrual earnings management around initial public offerings under different regulatory environments”, Journal of Business Finance and Accounting, Vol. 43 No. (7-8), pp.849-871. https://doi.org/10.1111/jbfa.12201.
Baatwah, S.R., Al-Qadasi, A.A. and Al-Ebel, A.M. (2020), “Religiosity at the top: does it interact with accounting expertise to limit real earnings management?”, Managerial Auditing Journal, Vol.35 No.9, pp.1343-1377. doi/10.1108/MAJ-12-2019-2521.
Barton, J. (2001), “Does the use of financial derivatives affect earnings management decisions?”, The Accounting Review, Vol.76 No.1, pp.1-26. https://doi.org/10.2308/ accr.2001.76.1.1
Barton, J. and Simko, P.J. (2002), “The balance sheet as an earnings management constraint”, The Accounting Review, Vol. 77 No. (s-1), pp.1-27. doi.org/10.2308/ accr.2002.77.s-1.1
Brau, J.C. and Fawcett, S.E. (2006), “Evidence on what CFOs think about the IPO process: practice, theory, and managerial implications”, Journal of Applied Corporate Finance, Vol.18 No.3, pp.107-117.doi.org/10.1111/j.1745-6622.2006.00103.
Campa, D. (2019), “Earnings management strategies during financial difficulties: A comparison between listed and unlisted French companies”, Research in International Business and Finance, Vol. 50, pp. 457-471.
Chan, L.H., Chen, K.C., Chen, T.Y. and Yu, Y. (2015), “Substitution between real and accruals-based earnings management after voluntary adoption of compensation 18 NMIMS Management Review ISSN: 0971-1023 Volume XXX Issue-5 | October 2022 clawback provisions”, The Accounting Review, Vol. 90 No.1, pp.147-174. doi. org/10.2308/accr-50862
Chen, C. L., Huang, S. H. and Fan, H. S. (2012), “Complementary association between real activities and accruals-based manipulation in earnings reporting”, Journal of Economic Policy Reform, Vol.15 No. 2, pp. 93-108. doi.org/10.1080/17487870.2012 .667965
Chi, W., Lisic, L.L. and Pevzner, M. (2011), “Is enhanced audit quality associated with greater real earnings management?”, Accounting Horizons, Vol.25 No.2, pp. 315-335. doi.org/10.2308/acch-10025
Cohen, D.A., Dey, A. and Lys, T.Z. (2008), “Real and accrual based earnings management in the pre and post Sarbanes Oxley periods”, The Accounting Review, Vol.83 No.3, pp. 757-787. doi.org/10.2308/accr.2008.83.3.757
Darrough, M. and Rangan, S. (2005), “Do insiders manipulate earnings when they sell their shares in an initial public offering?”, Journal of Accounting Research, Vol. 43 No.1, pp. 1-33. https://doi.org/10.1111/j.1475-679x.2004.00161
Das, R. C., Mishra, C. S. and Rajib, P. (2017), “Real Versus Accrual-based earnings management: Do Indian Firms Prefer One over the Other?”, Paradigm, Vol. 21 No.2, pp. 156-174. doi.org/10.1177/0971890717736214
DeAngelo, L.E. (1988), “Managerial competition, information costs, and corporate governance: The use of accounting performance measures in proxy contests”, Journal of Accounting and Economics, Vol. 10 No.1, pp. 3-36. doi.org/10.1016/0165-4101 (88)90021-3
Ding, R., Li, J. and Wu, Z. (2018), “Government Affiliation, Real Earnings Management, and Firm Performance: The Case of Privately Held Firms”, Journal of Business Research, Vol. 83, pp.138-150. doi.org/10.1016/j.jbusres.2017.10.011
Elleuch Hamza, S. and Kortas, N. (2019), “The interaction between accounting and real earnings management using simultaneous equation model with panel data”, Review of Quantitative Finance and Accounting, Vol. 53 No.4,1195-1227. 10.1007/ s11156-018-0779-5
Enomoto, M., Kimura, F. and Yamaguchi, T. (2018), “A cross‐country study on the relationship between financial development and earnings management”, Journal of International Financial Management & Accounting, Vol. 29 No.2, pp.166-194.
Ewert, R. and Wagenhofer, A. (2005), “Economic effects of tightening accounting standards to restrict earnings management”, The Accounting Review, Vol. 80 No.4, pp.101-1124. doi.org/10.2308/accr.2005.80.4.1101
Fields, T. D., Lys, T. Z. and Vincent, L. (2001), “Empirical research on accounting choice.”, Journal of Accounting and Economics, Vol. 31 No.1-3, pp. 255-307. doi. org/10.1016/S0165-4101(01)00028-3
Ge, W. and Kim, J.B. (2014), “Boards, takeover protection, and real earnings management”, Review of Quantitative Finance and Accounting, Vol.43 No.4, pp. 651-682. 10.1007/s11156-013-0388-2
Graham, J.R., Harvey, C.R. and Rajgopal, S. (2005), “The economic implications of corporate financial reporting”, Journal of Accounting and Economics, Vol.40 No. 1-3, pp. 3-73. doi.org/10.1016/j.jacceco.2005.01.002
Gramlich, J.D. and Sørensen, O. (2004), “Voluntary management earnings forecasts and discretionary accruals: evidence from Danish IPOs”, European Accounting Review. Vol. 13 No. 2, pp. 235-259. doi.org/10.1080/0963818042000203338
Gunny, K.A. (2010), “The relation between earnings management using real activities manipulation and future performance: Evidence from meeting earnings benchmarks”, Contemporary Accounting Research, Vol. 27 No.3, pp. 855-888. doi.org/10.1111 /j.1911-3846.2010.01029.
Healy, P.M. and Wahlen, J.M. (1999), “A review of the earnings management literature and its implications for standard setting”, Accounting Horizons, Vol. 13 No. 4, pp. 365-383. doi.org/10.2308/acch.1999.13.4.365
Ho, L.C.J., Liao, Q. and Taylor, M. (2015), “Real and accrual‐based earnings management in the pre‐and post‐IFRS periods: Evidence from China”, Journal of International Financial Management & Accounting, No. 26 No.3, pp. 294-335. doi. org/10.1111/jifm.12030
Jones, J. J. (1991), “Earnings Management During Import Relief Investigations”, Journal of Accounting Research, Vol. 29 No.2, pp. 193-228.
doi.org/10.2307/2491047 Kennedy, P. (2008), “A guide to econometrics”, John Wiley & Sons.
Kimbro, M. B. (2005), “Managing underpricing? The case of pre‐IPO discretionary accruals in China”, Journal of International Financial Management & Accounting, Vol. 16 No. 3, pp. 229-262. doi/abs/10.1111/j.1467-646X.2005.00118.x
Klein, A. (1998), “Economic determinants of audit committee composition and activity”, New York University, Centre for Law and Business. Working Paper, pp. 98-011.
Klein, A. (1998), “Economic determinants of audit committee composition and activity”, New York University, Centre for Law and Business. Working Paper, pp. 98-011.
Leuz, C., Nanda, D. and Wysocki, P.D. (2003), “Earnings management and investor protection: an international comparison”, Journal of Financial Economics, Vol. 69 No.3, pp.505-527. doi.org/10.1016/S0304-405X(03)00121-1
Li, L. (2019), “Is there a trade-off between accrual-based and real earnings management? Evidence from equity compensation and market pricing”, Finance Research Letters, Vol.28, pp. 191-197. doi.org/10.1016/j.frl.2018.04.021
Libby, R. and Seybert, N. (2010), “Behavioural Studies of the Effects of Regulation on Earnings Management and Accounting Choice”, In Accounting, Organizations, and Institutions: Essays in Honour of Anthony Hopwood,1,290.
Mizik, N. and Jacobson, R. (2007), “Myopic marketing management: Evidence of the phenomenon and its long-term performance consequences in the SEO context”, Marketing Science, Vol. 26 No.3, pp.361-379. doi.org/10.1287/mksc.1060.0261
Pincus, M. and Rajgopal, S. (2002), “The interaction between accrual management and hedging: Evidence from oil and gas firms”, The Accounting Review, Vol. 77 No.1, pp. 127-160. doi.org/10.2308/accr.2002.77.1.127
Premti, A. and Smith, G. (2020), “Earnings management in the pre-IPO process: Biases and predictors”, Research in International Business and Finance, Vol. 52, pp. 101120.
Roosenboom, P., Van der Goot, T. and Mertens, G. (2003), “Earnings management and initial public offerings: Evidence from the Netherlands”, The International Journal of Accounting, Vol. 38 No.3, pp. 243-266. doi.org/10.1016/S0020-7063(03)00048-7
Roychowdhury, S. (2006), “Earnings management through real activities manipulation”, Journal of Accounting and Economics, Vol. 42 No.3, pp.335-370. doi. org/10.1016/j.jacceco.2006.01.002
Teoh, S. H., Welch, I. and Wong, T. J. (1998), “Earnings management and the longrun market performance of initial public offerings”, Journal of Finance, Vol. 56 No.6, pp.1935-1974. doi/abs/10.1111/0022-1082.00079
Teoh, S.H., Wong, T.J. and Rao, G.R. (1998), “Are accruals during initial public offerings opportunistic?”, Review of Accounting Studies, No.3 No.1, pp.175-208. 10.1023/A:1009688619882
Teoh, S.H., Wong, T.J. and Rao, G.R. (1998), “Are accruals during initial public offerings opportunistic?”, Review of Accounting Studies, No.3 No.1, pp.175-208. 10.1023/A:1009688619882
