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

• DOI: http://doi.org/10.1002/jcaf.22406
• Date: 01 October 2019
• Published date: 01 October 2019
• Author: Rojana Khunkaew,Yang Qingxiang

EDITORIAL REVIEW

Substitution between accruals-based and real activities earnings

management of listed Thai firms

Rojana Khunkaew

1

| Yang Qingxiang

2

1

Major of Business Administration, School

of Management, Huazhong University of

Science & Technology, Wuhan, China

2

Department of Accounting, School of

Management, Huazhong University of

Science & Technology, Wuhan, China

Correspondence

Rojana Khunkaew, Major of Business

Administration, School of Management,

Huazhong University of Science &

Technology, Luoyu Road 1037, Wuhan,

China.

Email: k.rojana27@gmail.com

Abstract

This article examines the association between accruals earnings management

(AEM) and real activities earnings management (REM) based on 1,471 Thai firm

observations during 2014–2017. 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.

KEYWORDS

accruals earnings management, real activities earnings management, simultaneous equations,

substitution relationship

1|INTRODUCTION

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 Sarbanes–Oxley (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;30:99–110. wileyonlinelibrary.com/journal/jcaf © 2019 Wiley Periodicals, Inc. 99