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 88 Furthermore, changes in accounting practices and regulations may influence the accounting information employed in debt covenants (Ormrod and Taylor, 2004). Lenders use financial statements to monitor compliance with the bonding terms in such covenants. Accordingly, managers of firms that are close to violating accounting-based constraints in debt covenants have an incentive to make income-increasing accounting decisions to avoid or reduce the costs associated with this possible violation (Watts and Zimmerman, 1986). Prior research suggests that firms manage accruals in order to avoid debt covenant violations (DeFond and Jiambalvo, 1994; Dichev and Skinner, 2002; Zhang, 2008). Because data on actual debt covenants are not available for our sample, we follow prior research and use leverage as a proxy for the existence of accounting-based debt covenants ( DEBT it ), which is measured as the firm’s total debt divided by total assets at the end of the prior year. H 2 predicts leverage to be positively associated with discretionary accruals as well as real activities manipulation. In addition, short-term debt can affect a firm’s ability to pay off long-term liabilities and drive it closer to a debt covenant violation. Specifically, firms with more short-term debt may have a greater need to renegotiate that debt on favorable terms and thus have a greater incentive to manage earnings (Chandra, Ettredge, and Stone, 2006). Accordingly, we represent the tightness of accounting-based debt covenants ( ST_DEBT it ) as the firm’s short-term debt divided by total debt at the end of the prior year. H 2 asserts that the proportion of short-term debt is positively associated with discretionary accruals as well as real activities manipulation. Firm characteristics . Extant research documents that Big 8 audit firms (or their successors) constrain earnings management through discretionary accruals (e.g., Chi et al., 2011; Zang, 2012) and that managers prefer real activities manipulation to accrual management because auditors and regulators are less likely to scrutinize and detect real earnings management behaviors (e.g., Graham, Harvey, and Rajgopal, 2005). Accordingly, we assert that scrutiny increases with the presence of a Big 8 auditor and include BIG it , a dummy variable indicating whether a firm’s auditor is one of the Big 8 (or their successors). To the extent that increased audit scrutiny constrains accrual management, clients resort to real activities manipulation. Therefore, we expect the presence of a Big 8 auditor or its successor to be negatively (positively) associated with discretionary accruals (real earnings management devices). In both equations, we also include the natural logarithm of a firm’s market value of equity at year-end ( MV it ) to control for relative firm size and return on assets ( EARN it ),