Three Essays in Earnings Management to Sustain an Earnings String

• Author / Creator

  Na, Kyunga

• 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.

• Subjects / Keywords

  • Accrual Management
  • Earnings Management
  • Market Response
  • Real Activities Management

• Graduation date

  Spring 2013

• Type of Item

  Thesis

• Degree

  Doctor of Philosophy

• DOI

  https://doi.org/10.7939/R3C657

• License

  This thesis is made available by the University of Alberta Libraries with permission of the copyright owner solely for non-commercial purposes. This thesis, or any portion thereof, may not otherwise be copied or reproduced without the written consent of the copyright owner, except to the extent permitted by Canadian copyright law.