DOES INVESTOR PROTECTION PREVENT EARNINGS MANAGEMENT
ACTIVITY THROUGH REAL ACTIVITY
MANIPULATION?
ASIAN COMPARISON
Abstract
This
paper examines systematic differences in earnings management through real
activity manipulation across 6 Asia countries.
Contrary with Leuz (2003) finding that earnings
management through accrual manipulation is lower in economies with high
investor protection than in low investor protection. We predict that in economies with high investor protection, manager
prefer to manage earnings through real activity manipulation rather than
through accrual manipulation. Because accrual manipulation is more likely to
draw auditor or regulator scrutiny than real decisions about pricing and
production. Our findings are consistent with our prediction.
Keyword: earnings management, real
activity manipulation, investor protection
Introduction
Legal systems protect investors by conferring on them
rights to discipline insiders (e.g., to replace
managers), as well as by enforcing contracts designed to limit
insiders’ private control benefits (e.g., La Porta et
al., 1998; Nenova, 2000; Claessens et al., 2002; Dyck and Zingales, 2002).2
As a result, legal systems that effectively protect outside investors reduce insiders’
need to conceal their activities. Investor protection as a key institutional
factor affecting corporate policy choices (see Shleifer
and Vishny, 1997; La Porta et al., 2000), we focus on investor
protection as a significant determinant of earnings management activity. Leuz (2003) find: earnings management is more pervasive in
countries where the legal protection of outside investors is weak, because in
these countries insiders enjoy greater private control benefits and hence have
stronger incentives to manipulate firm performance...<< Download Jurnal >>
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