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Earnings management in the short- and long-term post-regulation periods

Espahbodi, H. Espahbodi, R. Kose, J.
Review of Quantitative Finance and Accounting. June 8, 2021

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We examine the change in the level and significance of accrual and real earnings management over the period 1996–2018. Our univariate results show that both accrual and real earnings management continue to persist, although they have significantly decreased over time. After controlling for significant factors that have been shown to affect earnings management, we find that both accrual and real-activities earnings management have significantly decreased in the short term after the regulations, but accrual earnings management reverted back to its pre-regulation levels in the long run. Further, contrary to the findings of prior research (e.g., Cohen et al. in Account Rev 83:757–787, 2008) that managers have shifted away from accruals to real earnings management in the short-term post-regulation period, we find evidence that firms actually reduced real earnings management both in the short- and long-term post-regulation periods. The results are robust to alternative sample designs and inclusion of additional control variables, and go against the widely held beliefs that accruals-based earnings management is significantly less prevalent now than it used to be.