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

83 NTU Management Review Vol. 30 No. 2 Aug. 2020 TA it /Asset it-1 = β 1 1/Asset it-1 + β 2 ΔSALES it /Asset it-1 + β 3 PPE it /Asset it-1 + ε it (1) where for fiscal year t and firm i , TA it represents total accruals, which we measure as earnings before extraordinary items and discontinued operations minus operating cash flows. Asset it-1 is total assets. ΔSALES it is the change in net sales from the prior year. PPE it is the gross value of property, plant, and equipment. We use the coefficient estimates from equation (1) to estimate the firm-specific normal accruals ( NA it ) for our sample firms: NA it = 1 1/Asset it-1 + 2 ( ΔSALES t – ΔAR it ) /Asset it-1 + 3 PPE it /Asset it-1 (2) where ΔAR it is the change in accounts receivable from the prior year. The measure of discretionary accruals is the difference between total accruals and the fitted normal accruals, defined as DA it = TA it /Asset it-1 – NA it . 6 3.2 Real Activities Manipulation Prior studies provide evidence that reducing the cost of goods sold by overproducing inventory and/or cutting discretionary expenditures capture real activities manipulation (e.g., Chi et al., 2011; Cohen et al., 2008; Cohen and Zarowin, 2010; Roychowdhury, 2006; Zang, 2012). Accordingly, we consider abnormally high levels of production costs and abnormally low levels of discretionary expenses as indicators of income-increasing real activities manipulations. 7 We measure the abnormal level of production costs ( RM_PROD it ) as the residuals from equation (3), which are estimated by year and industry identified using two-digit SIC codes: 6 We repeat our tests by using an alternative measure adjusted for a performance-matched firm’s discretionary accruals. As suggested by Kothari, Leone, and Wasley (2005), we match each firm-year observation with another from the same two-digit SIC code and year with the closest return on assets in the current year, ROA it (net income divided by total assets). Untabulated results using this alternate measure of accrual-based earnings management are consistent with those reported in the paper. 7 Following Zang (2012), we do not examine abnormal cash flows from operations because, as discussed in Roychowdhury (2006), real activities management affects this in different directions. Specifically, price discounts, channel stuffing, and overproduction decrease abnormal cash flows from operations, while cutting discretionary expenditures increases them. Accordingly, the net effect on abnormal cash flows from operations is vague.