We predict that managers of firms in countries where languages do not require speakers to grammatically mark future events perceive future consequences of earnings management to be more imminent, and therefore they are less likely to engage in earnings management. Using data from 38 countries, we find that accrual-based earnings management and real earnings management are less prevalent where there is weaker time disassociation in the language. Our study is the first to examine the relation between the grammatical structure of languages and financial reporting characteristics, and it extends the literature on the effect of informal institutions on corporate actions

Viewing the detection of earnings management from the perspective of a crime scene investigator sheds new light on prior research on earnings management and its close relative, earnings quality. The works of Ball and Shivakumar [2008. Earnings quality at initial public offerings. Journal of Accounting and Economics, in press.] and Teoh et al. [1998. Earnings management and the subsequent market performance of initial public offerings. Journal of Finance 53, 1935–1974.] are used to illustrate the application of seven components of a crime scene investigation to earnings management research

Quarterly earnings allow aggregation into annual earnings in four different ways. Fiscal year earnings is one measure of annual earnings, the others being earnings for annual periods ending at interim quarter-ends. We investigate earnings management in fiscal year earnings relative to these alternative measures of firms’ annual earnings. We confirm prior findings in Burgstahler and Dichev (1997. Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economics 24, 99–126) of discontinuities around zero and prior year earnings in histograms of earnings. Subsequent research questions whether these discontinuities are evidence of earnings management. Using histograms of our alternative annual earnings measures, we offer evidence suggesting earnings management is responsible for the discontinuities

For the first time in the literature, we provide evidence of dividend-based earnings management. The credibility of the contracting view of earnings management is enhanced by studies in different institutional settings. In this paper, the institutional setting is a debt-dominated capital market. On one hand, the implicit contract driving the earnings management behavior in our (keiretsu-type) financial environment is the smooth dividend stream expected by the large institutional equity holders. This creates a need for companies to report earnings high enough to pay out dividends. On the other hand, managing earnings upwards is costly because of tax consequences. We find that the predicted and actual earnings management are in the same direction, and the reported earnings depend on the dividend-based target earnings in Finland during 1970–1989. Our results provide new testable hypotheses for earnings management in companies that have owners with preference for stable dividends

We test the effect of audit effort on earnings management using a unique database of hours worked by auditors on 9,738 audits in Greece between 1994 and 2002. When audit hours are lower, (1) abnormal accruals are more often positive than negative, (2) positive abnormal accruals are larger, and (3) companies are more likely to manage earnings upwards in order to meet or beat the zero earnings benchmark. These results persist after we control for endogeneity between audit hours and earnings management. We conclude that low audit effort increases the extent to which managers are able to report aggressively high earnings

We compare US firms’ earnings with reconciled earnings for cross-listed non-US firms. Non-US firms’ earnings exhibit more evidence of smoothing, greater tendency to manage towards a target, lower association with share price and less timely recognition of losses. Firms from countries with weaker investor protection show more evidence of earnings management, suggesting that SEC regulation does not supplant the effect of local environment. There is more evidence of earnings management for firms reconciling to US GAAP than for those preparing local accounts in accordance with US GAAP, but both show more evidence of earnings management than US firms

We explore how the readability of annual reports varies with earnings management. Using the Fog Index to measure readability (Li, 2008), and focusing on the management discussion and analysis section of the annual report (MD&A), we predict and find that firms most likely to have managed earnings to beat the prior year's earnings have MD&As that are more complex. This disruption of the overall pattern of readability increasing with the level of earnings found in Li (2008) challenges the ontological explanation that good news is inherently easier to communicate, and shows that obfuscation contributes to making disclosures more complex

We provide new evidence that firms appear to manage long-run earnings upward in order to manage rank and file employees’ perceptions of employment security. In particular, we exploit exogenous state-level changes in unemployment insurance benefits and test for partial unwinding of prior upward earnings management when benefits increase. Consistent with the hypothesis, we find a significant reduction in abnormal accruals, increased recognition of special items and write downs, and greater likelihood of net income-reducing restatements, following an increase in state-level unemployment benefits. A number of cross-sectional results are also consistent with the hypothesis

Previous findings that upward earnings management causes a kink in the distribution of annual earnings cannot be verified without a well-specified benchmark for pre-managed annual earnings. We model shifts in the cumulative earnings distribution during the fourth quarter to explain the kink's formation. Logistic regression results show that compared to a control group, a high proportion of firms with small cumulative profits or losses at the beginning of the fourth-quarter report small annual profits rather than small annual losses. This suggests that upward earnings management causes the kink and indicates which firms are likely to manage earnings upward

We investigate market behavior in a setting where managerial incentives to manipulate earnings and market price should be apparent ex ante to market participants. We find evidence of abnormally low discretionary accruals in the period following announcements of cancellations of executive stock options up to the time the options are reissued. Nevertheless, analysts and investors are not misled. Discretionary accruals have little power in explaining stock price performance during this period. Moreover, discretionary accruals do not explain subsequent analyst forecast errors. Thus, our findings suggest that, in this transparent setting, analysts and investors do not respond to earnings management