An empirical study on the impact of earnings management on cumulative abnormal returns of selected publicly listed companies in the Philippines from 2007-2013: Earnings management choice between accounting-based and real activities-based manipulation

Earnings management has been one of the most widely discussed phenomena. The exercise of managerial discretion and judgment in the financial reporting process has been a way used by some managers to exhibit an opportunistic behavior to mask the true economic performance of an entity and eventually mislead its stakeholders. I focused on capital market incentives around earnings management in the Philippine setting, covering years 2007-2013. In particular, given the presence of financial statement evidence, I investigated how investors react to evidences of earnings management around the release of SEC Form 17-A. The study also explored two ways to facilitate earnings management- through discretionary accruals and reductions in discretionary expenditures. Results reveal that earnings management either through accounting-based or real-activities based manipulation does not significantly influence cumulative abnormal returns after the release of SEC Form 17-A. This can be attributed to the inherent complexity of the earnings management mechanism and the efficiency of the Philippine Stock Exchange (PSE)

Determinants of earnings management choice among publicly listed industrial firms in the Philippines

© 2018 by De La Salle University. Earnings management involves the use of acceptable accounting rules and procedures as well as circumventing business activities to achieve desired ends. In the literature, earnings management through discretionary accruals has always been associated with an opportunistic motive to mislead various stakeholders about a business’ financial performance to the advantage of owners and managers. However, the literature presented two possible motives behind earnings management, namely: an opportunistic, a self-serving perspective which mirrors the agency problem; and an efficient motive which utilizes earnings management as a signalling mechanism to send signals about the firm to its stakeholders. In this paper, we investigate the type of earnings management employed by industrial firms in the Philippine Stock Exchange (PSE). Evidence was found that managers use earnings management in an efficient perspective to signal private information to stakeholders. In addition, the study examined firm-specific characteristics in terms of profitability, leverage, cash flows from operations, and firm size. Furthermore, this study also examined corporate governance variables such as the number of independent board of directors, the presence of CEO duality, board size, and audit quality. We also examined the effect of these variables on a firm’s tendency to engage in earnings management using discretionary accruals. Results revealed that among the firm specific characteristics, leverage and cash flow from operations are both significantly and positively related to a firm’s level of discretionary accruals, while profitability was found to be negatively related. However, we found that corporate governance variables such as board size, board independence, CEO duality, and audit quality were all insignificant predictors of a firm’s earnings management activities