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

Abstract

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)