臺大管理論叢 NTU Management Review VOL.30 NO.2

The Effects of Relaxing the Reconciliation Requirement in Foreign Private Issuers’ SEC Filings on Earnings Management Strategies: IFRS Adopters versus U.S. GAAPAdopters 80 using IFRS experience a positive stock market response to the regulatory change announcement. In contrast, there are no such effects for other cross-listed firms. On the other hand, Dugan, Turner, and Wheatley (2018) document that the reconciliation elimination leads to an overall decrease in the international asset allocation for U.S. institutional investors in European Union (E.U.) firms that are cross-listed on U.S. stock exchanges. As discussed previously, prior studies provide inconclusive evidence on the relative benefits and costs of the SEC decision to eliminate the reconciliation requirement and on the relative quality of U.S. GAAP and IFRS. The adverse impact of an accounting change could be lessened by altering the accounting numbers to meet earnings targets (Iatridis, 2010). The extensive literature on earnings management, including those comparing financial statements prepared under different sets of standards, largely focuses on discretionary accruals as the primary means by which managers smooth earnings (e.g., Lang et al., 2003; Subramanyam, 1996; Tucker and Zarowin, 2006) or take a “big bath” (e.g., Houmes and Skantz, 2010; Yin and Cheng, 2004). A smaller stream of literature provides evidence of firms altering real activities to distort earnings (e.g., Cheng, Lee, and Shevlin, 2016; Gunny, 2010). Accordingly, managers can reach earnings targets by using multiple tools. That is, to the extent that the primary motive for altering real activities is earnings management, firms may also exercise discretion over operating accruals. Also, there is substantial evidence from prior studies that managers use accrual-based earnings management and real activities manipulation simultaneously to dampen income volatility. Barton (2001), for instance, documents that managers use interest rates, foreign exchange derivatives and abnormal accruals as partial substitutes for smoothing earnings, and that their magnitudes are determined simultaneously. Consistent with Barton (2001), Huang et al. (2009) also find a negative relation between derivative use and abnormal accruals, suggesting that derivative instruments act as partial substitutes for abnormal accruals. However, these studies assess only one form of real transactions (i.e., derivative hedging). Given the portfolio of earnings management strategies, managers probably use multiple real activities simultaneously to distort earnings. Recent research has started to examine the extent to which managers distort earnings by manipulating sales, overproducing inventory to decrease the cost of goods sold, and reducing discretionary expenditures, all of which represent deviations from optimal levels of real activity, as well as altering the magnitude of discretionary accruals for purposes of achieving short-term earnings goals (e.g., Chi, Lisic, and Pevzner, 2011; Cohen, Dey, and Lys, 2008; Cohen and