Related literature Proceeding E Book 4A Turky

912 to meet earnings target or to increase reported earnings.Baber et al. 1991, Bushee 1998, Dechow and Sloan 1991 Kasznik1999 also provide evidence that research and development costsRD or advertising expenditures are abnormally lower in the firms whose real earnings is lower than their voluntarily disclosed earnings Specifically, Roychowdhury2006 is to develop empirical method to detect real activity management. Also, this paper examine cash flow from operationsCFO, production costs, and discretionary expenses, variables that should capture the effect of real operations better than accruals. Next, this study use these measures to detect real activities management around the zero earnings threshold. He find evidence consistent with firms trying to avoid losses by offering price discounts to temporarily increase sales, engaging in overproduction to lower cost of goods soldCOGS, and reducing discretionary expenditures aggressively to improve margins. Zang2007 study whether managers use real and accrual manipulations as substitutes in managing earnings, and study the order that managers make these decisions. Zang2007 find that managers determine real manipulation before accrual manipulation. This paper use an empirical model that captures the sequentiality of real and accrual manipulations to test the tradeoffs between the two. The results of the broad sample tests are consistent with managers using real and accrual manipulations as substitutes. However, in a small sample test examining firms subject to securities class action lawsuits, Zang2007 examine whether real and accrual manipulations change over time with changes in litigation risk. Cohen et al.2008 document that accrual-based earnings management increased steadily from 1987 until the passage of the Sarbanes-Oxley ActSOX in 2002, followed by a significant decline after the passage of SOX. Conversely, the level of real earnings management activities declined prior to SOX and increased significantly after the passage of SOX, suggesting that firms switched from accrual- based to real earnings management methods after the passage of SOX. They find that firms that just achieved important earnings benchmarks used less accruals and 913 more real earnings management after SOX when compared to similar firms before SOX. In addition, they provides evidence that the increases in accrual-based earnings management in the period preceding SOX were concurrent with increases in equity-based compensation. By existing literature, managers are able to use accruals or real activity to managing earnings of the firm, specifically. Also, they provide that real activity management increase more than accrual-based earnings management after the passage of SOX. This study differs from previous literatures in the following respects. First, this paper tests whether RM or DM are determined sequentially or simultaneously and whether those decisions are different depending on quarters. Second, we identified several factors, which may affect DM and RM differently and the relation between DM and RM. The results of this study will provide a insight on RM as a tool means for managing earnings to related regulators and users of the firms financial information

3. Hypotheses and Samples description

3 .1 Hypotheses Managers are likely to use various methods in managing earnings. Specifically, managers often have used discretionary accruals as a method managing earningsDechow and Sweeney 1995, Jones 1991, Kothari, Leone and Wasley 2005. Mangers use discretionary accruals managementDM more easily because DM does not have a direct cash flow effect. On the other hand, it is likely that DM could be detected more easily by serious auditors. Also, managers can use sales, production, discretionary expenditures in managing earnings.Healy and Wahlen 1999, Dechow and Skinner 2000, Fundenberg and Tirole 1995. Real activity managementRM is less likely to catch by auditors although it affect directly cash flows. 914 Thus, it is not clear which method managers prefer to use in managing earnings. Manager may choose earnings management methods strategically. First of all, if DM and RM are determined simultaneouslysequentially, earnings management both DM and RM may be used simultaneously or sequentially. Thus, this study set up a following research hypothesis to examine whether DM and RM could be used simultaneously or sequentially Hy Hypothesis1: Discretionary accrual-based earnings managementDM and real activity earnings managementRM will be used simultaneously. In addition, earnings management for RMor DM could be affected by the following factors. First, firms audited by Big4 audit firm may be constrained in DM. DM is more likely constrained than RM because such DM may be revealed if the firms are audited through more stricter auditing process, which will be performed usually by Big4 audit firms. Thus, firms audited by Big4 will prefer RM to DM so that their earnings management is not constrained. Second, firms used DM in previous period may be constrained in using DM in next period since DM tend to be revered shortly. In this case managers are more likely to utilize RM. Further, earnings management for DM may be affected by following factors for RM. Factors for RM are firms financial health, the percentage of the companys sales to the total sales of its industry, and companies leadership in the industry. These factors will affect managing earnings for DM. Thus, we set up following research hypothesis to test whether factors for DMor RM will affect RMor DM. Hypothesis2: Firms audited by Big4 will manage earnings by using real activitiesRM rather than discretionary accrualsDM. Hypothesis3: Firms having larger abnormal accruals at in the previous period will manage earnings using real activitiesRM rather than discretionary accrualsDM.