Substitution between accruals‐based and real activities earnings management of listed Thai firms

Date01 October 2019
Published date01 October 2019
AuthorRojana Khunkaew,Yang Qingxiang
Substitution between accruals-based and real activities earnings
management of listed Thai firms
Rojana Khunkaew
| Yang Qingxiang
Major of Business Administration, School
of Management, Huazhong University of
Science & Technology, Wuhan, China
Department of Accounting, School of
Management, Huazhong University of
Science & Technology, Wuhan, China
Rojana Khunkaew, Major of Business
Administration, School of Management,
Huazhong University of Science &
Technology, Luoyu Road 1037, Wuhan,
This article examines the association between accruals earnings management
(AEM) and real activities earnings management (REM) based on 1,471 Thai firm
observations during 20142017. The study follows a modified Jones model and
Roychowdhury model to measure AEM and REM and extends the control variables
by adding the factors of top management team characteristics. For the investigation,
the study performs simultaneous equations and uses both ordinary least-squares and
two-state least-square methods to test the regression model. The results demonstrate
the negative relationship between AEM and REM which implies that the Thai firms
listed use AEM and REM as the substitution method, and the results based on indus-
try groups support the main findings of this study by presenting the negative associa-
tion between AEM and REM as a different level.
accruals earnings management, real activities earnings management, simultaneous equations,
substitution relationship
In prior research from 1988, researchers provided evidence
about the earnings management (EM) through accruals-
based earnings management (AEM) using the discretionary
accruals (DA), such as bad debt expense, inventory valua-
tion, and depreciation and by selecting the accounting poli-
cies (DeAngelo, 1988; Dechow, Sloan, & Sweeney, 1995;
Healy, 1985; Jones, 1991; Rangan, 1998). After the passage
of the SarbanesOxley (SOX) Act in 2002, managers cannot
rely on accruals-based management because it has a limita-
tion regarding the frequent changes in accounting policies;
they tend to use the opportunity of timing transactions dur-
ing the year to obtain an earnings target that becomes the
study of real activities earnings management (REM) (Cohen,
Dey, & Lys, 2008; Graham, Harvey, & Rajgopal, 2005;
Roychowdhury, 2006). Roychowdhury (2006) explained
that real activities manipulation is performed by managers
who are motivated to report achieving the goals of normal
operating activities to cause some stakeholders to misunder-
stand and trust in a performance; REM was also divided into
three factors as follows: cash flow operation (CFO), discre-
tionary expense, and production cost. In addition,
researchers found that, in the years after 2006, managers use
AEM and REM simultaneously (Cohen et al., 2008;
Cohen & Zarowin, 2010; Zang, 2007).
Researchers found evidence that managers used two
approaches in both substitution and complementary ways.
Pincus and Rajgopal (2002) studied oil and gas firms, and
their results demonstrated a substitution relationship between
two approaches, which implies that managers used AEM
and REM as a substitution in order to meet their earnings
target. Consistent with recent research, which also demon-
strated the substitutive association between AEM and REM
(Chi, Lisic, & Pevzner, 2011; Zang, 2012; Zhu, Lu, Shan, &
Zhang, 2015), Zhu et al. (2015) found that AEM is nega-
tively related to REM based on a Chinese reverse merger,
and the level of both earnings management approaches can
Received: 28 May 2019 Accepted: 15 June 2019
DOI: 10.1002/jcaf.22406
J Corp Acct Fin. 2019;30:99110. © 2019 Wiley Periodicals, Inc. 99

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