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Three Essays in Earnings Management to Sustain an Earnings String Open Access


Other title
Market Response
Accrual Management
Earnings Management
Real Activities Management
Type of item
Degree grantor
University of Alberta
Author or creator
Na, Kyunga
Supervisor and department
Dr. Jennifer Kao (Accounting, Operations and Information Systems)
Examining committee member and department
Dr. Bin Ke, Division of Accounting, Nanyang Technological University
Dr. Christoph Frei, Accounting, Mathematical and Statistical Sciences, University of Alberta
Dr. Tom Schneider, Accounting, Operations & Information Systems, University of Alberta
Dr. Yonghua Ji, Accounting, Operations & Information Systems, University of Alberta
Dr. Yao Tian, Accounting & Finance, San Jose State University
Dr. Jennifer Kao, Accounting, Operations & Information Systems, University of Alberta
Faculty of Business
Date accepted
Graduation date
Doctor of Philosophy
Degree level
This thesis presents three essays on earnings management of firms with a string of consecutive earnings increases for at least five years (labelled an earnings string). In Chapter II, I examine the accrual management practice of firms with an earning string (labelled ES firms) along the string, and find that ES firms are more likely to increase discretionary accruals in the final two years of an earnings string and decrease discretionary accruals in the year when the string is broken. Further analysis shows that while accrual management starts during the middle part of an earnings string, it intensifies near the end. These findings imply that ES firms tend to use aggressive accrual management to sustain an earnings string when the string is toward the end. However, the discretionary accruals of such firms drop sharply at the break of an earnings string, presumably due to accrual reversal or a big bath strategy. I extend the findings in Chapter II to Chapter III by investigating the patterns of real activity management by ES firms along an earnings string. Results indicate that ES firms start to manage their real activities mid-way through the earnings string and significantly increase the intensity during the last two years of an earnings string. However, such firms do not undertake income-decreasing real activity management by raising discretionary expenses in the break year, perhaps out of concern that such action worsens the already poor financial situation that has halted the earnings string. In Chapter IV, I examine the market reaction to earnings management of ES firms, especially focusing on whether the market response is different when ES firms engage in accrual management from when they use real activity management. I find that capital market significantly reduces its rewards to ES firms when accrual management of these firms is high compared to when it is low. On the other hand, the market response to real activity management of ES firms is insignificant or mixed, suggesting that it is more difficult for investors to identify real activity management of ES firms compared to accrual management of such firms.
Permission is hereby granted to the University of Alberta Libraries to reproduce single copies of this thesis and to lend or sell such copies for private, scholarly or scientific research purposes only. Where the thesis is converted to, or otherwise made available in digital form, the University of Alberta will advise potential users of the thesis of these terms. The author reserves all other publication and other rights in association with the copyright in the thesis and, except as herein before provided, neither the thesis nor any substantial portion thereof may be printed or otherwise reproduced in any material form whatsoever without the author's prior written permission.
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