What is real earning management?

What is real earning management?

What is real earning management?

Real earnings management (REM) is defined as management operational activities to alter reported earnings in a particular direction, which is achieved by overproducing inventory to lower the cost of goods sold (COGS) or cutting discretionary expenses (i.e., advertising expenditures, research and development …

What are the types of earnings management?

There are two key types of earnings management: adjusting individual accounting policies and using different accrual methods. In turn, these two methods can be used to either increase or decrease a firm’s current earnings.

Is earning management legal?

Earnings management may be defined as “reasonable and legal management decision making and reporting intended to achieve stable and predictable financial results.” Earnings management is not to be confused with illegal activities to manipulate financial statements and report results that do not reflect economic reality …

Is earnings management good or bad?

Earnings management is “bad”, in the sense that it reduces the reliability of financial statement information. There is, however, a dependence on earnings management to translate inside information into public information, as the costs of uncovering inside information are often very high.

Why is earning management important?

Companies use earnings management to smooth out fluctuations in earnings and present more consistent profits each month, quarter, or year. Management can feel pressure to manage earnings by manipulating the company’s accounting practices to meet financial expectations and keep the company’s stock price up.

What are the consequences of real earnings management?

Real earnings management (RM) occurs when managers undertake actions that deviate from the first best practice to increase reported earnings.1 This paper examine the extent to which real earnings management affects subsequent operating performance and whether investors and analysts recognize the consequences of real earnings management.

Which is better earnings management or accrual management?

Zang (2007) shows that managers use accrual and real earnings manipulation as substitutes to accounting numbers. However, Graham et al. (2005) shows that real earnings management is more likely to be selected by management to increase their earnings target.

How does earnings management affect operating cash flows?

Meanwhile, accrual-based earnings management and real earnings management through sales manipulation enhances subsequent operating cash flows. However, real earnings management through discretionary expenditures does not influence operating cash flows.

Which is the best paper on earnings management?

This paper reviews the recent studies on REM to provide updated and comprehensive information about this type of earnings management. Specifically, the review focuses on REM definitions, motivations, techniques, consequences, and measurement.