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 84 PROD it /Asset it-1 = k 1 1/Asset it-1 + k 2 SALES it /Asset it-1 + k 3 ΔSALES it /Asset it-1 + k 4 ΔSALES it-1 /Asset it-1 + ε it (3) where for fiscal year t and firm i , PROD it is the sum of cost of goods sold and change in inventory during the year. Asset it-1 is total assets. SALES it is net sales. ΔSALES it is the change in net sales from the prior year. The higher the estimated residual from equation (3), the larger is the amount of inventory overproduction, which thereby leads to an increase in reported earnings through the reduction of cost of goods sold. We calculate the abnormal level of discretionary expenditures ( RM_DISX it ) as the residuals multiplied by -1 from equation (4), which is also estimated by year and industry identified using two-digit SIC code: DISX it /Asset it-1 = k 1 1/Asset it-1 + k 2 SALES it-1 /Asset it-1 + ε it (4) where DISX it is the discretionary expenditures (i.e., the sum of advertising, R&D, and SG&A expenses) during the year. We multiply the residuals estimated from equation (4) by -1 so that the higher the amount, the more likely it is that the firm is cutting discretionary expenditures to increase reported earnings. In order to capture the total effects of real earnings management, we aggregate the two real activities manipulation measures, RM_PROD it and RM_DISX it , into one proxy, RM_SUM it , by taking their sum. Because the two individual variables have different implications for earnings that may dilute any results using the composite measure alone (Cohen et al., 2008; Cohen and Zarowin, 2010), we report results corresponding to the comprehensive real earnings management measure (i.e., RM_SUM it ) as well as the two individual real earnings management proxies (i.e., RM_PROD it and RM_DISX it ). 4. Empirical Design 4.1 Controlling for Self-Selection Bias Because the decision to switch to U.S. GAAP/IFRS is voluntary, our sample firms do not represent a random sample of non-U.S. cross-listed firms applying domestic standards prior to the elimination of the reconciliation requirement. To control for the effects of self- selection, we follow the two-stage regression procedure suggested by Heckman (1979). In the first stage, we analyze the decision to voluntarily change filing status to U.S. GAAP/