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Uncovering Real Earnings Management: Pay Attention to Risk-Taking Behavior

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journal contribution
posted on 18.10.2021, 06:09 authored by Samar Alharbi, Md Al MamunMd Al Mamun, Nader Atawnah
We examine the impact of corporate risk-taking on firm-level real earnings management. We find that firms with higher risk-taking engage in higher real earnings management. Our results are robust to a series of robustness tests, including simultaneous least squares approach, firm fixed effect, change analysis, and pseudo difference-in-difference analysis. Additional analyses reveal that the impact of risk-taking on real earnings management is more pronounced among firms that experience prior-year loss and are run by top-echelons who are risk lovers. Sarbanes-Oxley Act (SOX) regulation does not attenuate the positive effect of risk-taking on real earnings management. However, external monitoring by institutional investors and takeover susceptibility curb the relation between risk-taking and real earnings management. Our study highlights that outsider, such as investors and regulators, should pay close attention to a firm’s risk-taking behavior to unravel the extent of real earnings management in the firm.

History

Publication Date

23/09/2021

Journal

International Journal of Financial Studies

Volume

9

Issue

4

Article Number

53

Pagination

18p.

Publisher

MDPI

ISSN

2227-7072

Rights Statement

The Author reserves all moral rights over the deposited text and must be credited if any re-use occurs. Documents deposited in OPAL are the Open Access versions of outputs published elsewhere. Changes resulting from the publishing process may therefore not be reflected in this document. The final published version may be obtained via the publisher’s DOI. Please note that additional copyright and access restrictions may apply to the published version.

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