Abstract

Archived studies on earnings management in Taiwan generally investigate single real
activity or accounting accruals. Unlike prior studies, this study examines multiple real activities and accounting accruals simultaneously for Taiwan’s listed firms. We examine the sequence of exercising accounting discretions and real activities manipulations. Our empirical results show that managers determine the level of accounting discretions before that of real activities manipulations. In addition, in order to avoid loss, the likelihood of employing accounting accruals is significantly higher than that of real activities manipulations such as channel stuffing, cutting discretionary expenditures and overproducing inventories. Our empirical results are inconsistent with Zang (2012). Further investigation with quarterly data shows Zang’s conclusions are valid only in the fourth quarter. That is, to avoid annual losses, managers are apt to exercise real activities
manipulation than accounting accruals in the fourth quarter, compared to previous three quarters. This finding has not been documented in literature.  

Keywords

earnings managementreal activities manipulationsaccounting discretion