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 86 explain the magnitudes of abnormal accruals and real earnings management as a function of executives’ reporting incentives and other predetermined firm characteristics: DA it = τ 0 + τ 1 RM it + τ 2 BBATH it + τ 3 SMOOTH it + τ 4 DEBT it + τ 5 ST_DEBT it + τ 6 BIG it + τ 7 MV it + τ 8 EARN it + τ 9 DA it-1 + τ 10 MILL it + ε it (6) RM it = δ 0 + δ 1 DA it + δ 2 BBATH it + δ 3 SMOOTH it + δ 4 DEBT it + δ 5 ST_DEBT it + δ 6 BIG it + δ 7 MV it + δ 8 EARN it + δ 9 LTGN + δ 10 MILL it + ε it (7) where DA it ( it-1 ) is as defined previously, and RM it represents the two real earnings management metrics, RM_PROD it and RM_DISX it , and the combined variable, RM_SUM it . H 1 predicts that the coefficients of RM it and DA it will be significantly either positive or negative in equations (6) and (7), respectively. We include the inverse Mills ratio ( MILL it ) from the probit estimation as an additional explanatory variable to control for the effect of self-selection. We devote the remainder of this section to defining the variables of interest in equations (6) and (7) and describing their measurement. 4.2.1 Factors to Affect Accrual Management and Real Activities Manipulation Reporting incentives . Extant research (e.g., Christensen et al., 2015) indicates that managerial reporting incentives dominate accounting standards in influencing accounting quality. Specifically, management preferences and incentives influence earnings management strategies in more significant and direct ways. The empirical evidence reveals that earnings management actions are affected mainly by “big bath,” income smoothing, and debt covenant restrictions. The big bath hypothesis suggests that firms “save up” discretionary accruals or losses and then record several in a period in which earnings are extremely low. That is, if a manager cannot manipulate earnings to reach a target level, he/she will attempt to decrease current earnings in favor of increasing future earnings and, therefore, future bonuses. 8 Specifically, if a firm’s profitability ranks relatively low in its industry, its 8 A proxy for management compensation could also be included in the analysis. However, prior research (e.g., Healy, 1985) indicates that the details of the bonus calculations vary across plans. Managers’ incentives to report higher earnings in a given year may vary with these details. Because it is difficult to get enough details about compensation arrangements, more general proxies for “big bath” and smoothing incentives are used in the analyses.