The Effect O f Investment Opportunity Set On The Association Between Incentives And Earnings M anagement Level

The Effect Of Investment Opportunity Set On The Association Between Incentives And

Earnings Management Level

Prihat Assih

Accounting Department, Economics Faculty Merdeka University

Zaki Baridwan, Indra Wijaya Kusuma, Supriyadi, Gudono

Accounting Department, Economics Faculty Gadjah Mada University

ABSTRACT

T h e o b j e c t i v e o f t h i s r e s e a r c h is t o i n v e s t i g a t e t h e e f f e c t o f investment opportunity set on the association between managers' incentives to manage earnings and the level of earnings management. The incentives to engage in earnings management

financial leverage level, firm’s size, and public.ownership or firm’s common stock. Discretionary accrual is used to measure

level of earnings management. Result show that there are positive

support argument that the higher of investment opportunity set the greater

positive effect of financial leverage and public ownership on the level of earnings management. Manager of firms with relatively more investment opportunity set

have wider opportunity or more discretion to manage reported earnings.

would

Keywords: Earnings management, investment opportunity set, information asymmetry.

Background

Earnings information is important indicator for evaluating firm financial performance. Managers determine the short term reported earnings of their u m p a n i e s b y : 1) m a n a g i n g , p r o v i d i n g l e a d e r s h i p , a n d d i r e c t i n g t h e u s e o f

e s o u r c e s in o p e r a t i o n , 2 ) s e l e c t i n g t h e t i m i n g o f s o m e n o n o p e r a t i n g e v e n t s , a n d

3) choosing the accounting methods that are used to measure short term

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2 The E ffect o f In vestm en t O pportunity ...

earnings. Most managers always to exert

a stable financial performance. Growing systematic evidence supports the argument that earnings management is a c o m m o n p r a c t i c e in f i r m s ( B a g n o l i a n d W a t t s , 2 0 0 1 ; B e n e i s h , 2 0 0 1 ; AlNajjar and Rhiahi-Belkaoui, 2001). Managers of firms routinely manipulate or

' m a n a g e ” r e p o r t e d f i n a n c i a l i n f o r m a t i o n in r e s p o n s e t o a w i d e v a r i e t y o f incentives with potentially significant consequences to the firm’s management, investor, creditor, and others.

The level of earnings management will be higher if management has incentive and opportunity to do so (Dye, 1988; Trueman and Titman, 1988; Christensen

et al., 1999).

The opportunity to engage earnings management exists when the manager knows some things, which others do not. The existence of information asymmetry between firm management and firm shareholder is an necessary condition, which must be met for earnings management to exist. When

information asymmetry is high, stakeholders do not have necessary resources, incentives or access to relevant information to monitor manager’s action

(Schipper. 1989).

The level of information asymmetry could be varying across the firms (Ambarish

et al. 1987). The level of information asymmetry related to firms

investment. The information asymmetry could be relative!) larger lor firms with relatively more investment opportunity set than firms with relatively more asset-

in p l a c e . I t is l i k e l y t h a t m a n a g e r i n t h a t f i r m s h a v e m o r e s p e c i f i c k n o w l e d g e about their firm’s assets and that value of the growth opportunities is less observable. There is therefore likely to be a relatively large informational asymmetry between manager and outsiders, especially if part of asset value

c o m p r i s e s i n f o r m a t i o n t h a t is p r o p r i e t a r y . A n i n c r e a s e d i n v e s t m e n t o p p o r t u n i t y s e t is e x p e c t e d t o c r e a t e o p p o r t u n i t y f o r e a r n i n g s m a n a g e m e n t .

T h i s r e s e a r c h is m o l i v a t e d t o e x t e n d p r e v i o u s e a r n i n g s m a n a g e m e n t r e s e a r c h which

focused on examining incentives and consequences of earnings management

conducted in investigating environment surrounding earnings management practices. This study considers the level of firm’s investment opportunity set (IOS) as condition that represents the opportunity to wider practice of earnings management.

This research contributes to the extend association literature by examining the impact of investment opportunity set level, as a condition that represents the wider opportunity to practice earnings management, on the association between incentives

and the

magnitude

of earnings

management. Examining the

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The International Journal o f Accounting and Business Society 3

interaction between investment opportunity set and manager’s incentives on the earnings management is important to the theory that the level of firm’s

investment opportunity set can increase magnitude of earnings management that related to a number of incentives. The result of this research will useful to

investor for better understanding reported earnings. Investors should not naively use the accounting income numbers without any adjustment for manipulation possibility of reported income. Accounting standard setter may find the result of this study useful for evaluating the mandated additional disclosure that give sufficient information for better understanding reported earning. Finally, the result of this research will useful to auditor for incentives to hold responsible for better quality for financial reporting of firm.

T h e p u r p o s e o f t h i s p a p e r is t o i n v e s t i g a t e t h e m o d e r a t i n g e f f e c t o f t h e l e v e l o f investment opportunity set on the association between managers’ incentives to

engage and the level of earnings management. "'V

Literature Review Condition Giving Rise of Earnings Management

Virtually prior research on earnings management has taken an economic p e r s p e c t i v e . T h a t is t h e r e s e a r c h h a s f o c u s o n q u e s t i o n a b o u t t h e i n c e n t i v e s

managers have to manage earnings and the consequences of their manipulation action. Prior published researches also shown that managers’ action are related to a number of their incentives. These incentives range from efficient earnings

management that cost-effectively resolves the firms’ agency problem to opportunistic earnings management that maximizes management welfare at the expense of other stakeholders.

R e s e a r c h e s h a v e d e t e c t e d e a r n i n g s m a n a g e m e n t in r e s p o n s e t o f i r m a n d i n d u s t r y specific such as high debt levels and avoiding debt covenant violation (Deakin,

1979; Dhaliwal, 1980; Bowen

et a/., 1981, Zmijewski and Hagerman, 1981:

Defond and Jiambalvo, 1994); reducing the possibility of an unfavorable ruling

a n d t h e c o s t a s s o c i a t e d w i t h a n t i t r u s t v i o l a t i o n s ( C a h a n 1 9 9 2 ; N a ’i m d a n Hartono, 1996), increasing the offering proceeds for its share of stock (Neil

et al., 1995, Ranggan 1998, Richardson 1998, Teoh et al., 1998; Sutanto, 2000; dan Gumanti, 2001), reducing firm’s tax liabilities (Boyton

et al., 1992), and

increasing likelihood of obtaining import relief or increasing the amount of relief granted (Jones,

1 9 9 1 ) . T h e y h a v e a l s o o b s e r v e d e a r n i n g s m a n a g e m e n t in response to more opportunistic incentives such as bonus plan targets (Healy, 1985;

(DeAngelo# 1988, Pourceu,1993).

Holthausen

et al., 1995)

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4 The E ffect o f In vestm en t O pportunity .

In t r y i n g t o g e t a h a n d l e o n w h i c h d i a l m a n a g e r s w i l l r e a c h f o r w h e n t h e y d e c i d e t o m a n a g e e a r n i n g s , it w i l l a l s o n e e d t o c o n s i d e r a v a r i e t y o f f a c t o r s t o l i m i t

e a r n i n g s m a n a g e m e n t . A f u n d a m e n t a l q u e s t i o n p o s e d f o r a c c o u n t i n g r e s e a r c h is to identify the condition that would limit or wider the opportunity to the practice of

Analytical model have demonstrated that the existence of information asymmetry between firms management and firm shareholders is a necessary condition for a practice of earnings management (Dye, 1988; Trueman and Titman, 1988). Thus there are a principal factor that generate earnings management. That is the inability of manager to communicate all dimensions of their private information to shareholders. High level of information asymmetry between manager and shareholder is evidence of shareholders lacking sufficient resources, incentives, or access to relevant information to monitor manager action (Schipper, 1989).

earnings management

(Jiambalvo,

W h e n i n f o r m a t i o n a s y m m e t r y ' is h i g h s u c h f i r m m a y a b l e t o m a n a g e e a r n i n g s without being detected by outsiders.

Information Asymmetry and Investment Opportunity Set

The information asymmetry could be relatively larger for firms with relatively more growth opportunities or investment opportunity set than firms with relatively more asset-in place. The greater investment opportunity set, the more

likely the firm will not be monitored as effectively as firm with less investment opportunity set. Firms with relatively more investment opportunity set, which

largely comprised of intangible growth options more difficult to monitor, or less o b s e r v a b l e . O n t h e o t h e r h a n d , i f f i r m i s c o m p r i s e d l a r g e l y o f a s s e t - i n p l a c e it is relatively easy for outsider to monitor. Thus the asymmetric information could

be relatively larger for firms with relatively more investment opportunity set than firms with relatively more asset-in place (Ambarish

ct al„ 1987; Skinner,

1993). Managers of firms with relatively more investment opportunity set would have wider opportunity or more discretion to manage earnings. The incentive may be the same anytime, but the opportunity to manage earnings may be hampered if the firm largely comprises asset-in place, which is relatively easy monitored by outsiders.

Hypotheses Development

A v a s t n u m b e r o f i n c e n t i v e s f o r e a r n i n g s m a n a g e m e n t h a v e b e e n p r o p o s e d in t h e academic literature. Manager of firms that are close to violating debt covenant engage earnings management that reduce the likelihood of default (Watts and Zimmerman,

1986). Due to the cost of accessing actual debt covenant information, related prior research has generally used a proxy for the existence

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The In tern ation al J o u rn a l o f A c co u n tin g a n d B u sin ess S ociety 5

a n d t i g h t n e s s o f a c c o u n t i n g - b a s e d c o v e n a n t s . T h e m o s t f r e q u e n t l y u s e d p r o x y is the debt-equity ratio or leverage (Dhaliwai. 1990; Zmijewski and Hagerman,

1 9 8 1 ; D a l e y a n d V i g e l a n d , 19 8 3 ; D e F o n d a n d J i a m b a l v o , 1 9 9 4 ) . Manager of firm that are confront with the possibility of politically imposed wealth transfer will practice earnings management that reduce the likelihood or size of the transfer. Manager would manage earnings downward because lower reported earnings will result in benefit in the form of tax. political, and r e g u l a t i o n c o n s i d e r a t i o n , w h i c h e x c e e d t h e a d d i t i o n a l c o s t t o b e i n c u r r e d in f o r m of adjustment for. Researches generally have used firm size to measure the firm's venera'oility to political cost (Daley and Vigeland, 1993, Sweeney, 1994; Skinner. 1994).

et al , 1982; iNeuniub, 1989, Warfield e! al.,

Prior researches in accounting (Dhaliwai

1 9 9 5 ) e x a m i n e t h e r o l e o f o w n e r s h i p s t r u c t u r e in r e s o l v e p o t e n t i a l m a n a g e r - shareholder conflicts. A dominant public shareholder has both incentive and

a b i l i t y t o m o n i t o r m a n a g e m e n t s o t h a t t h e f i r m i s m a n a g e d in a m a n n e r consistent with profit maximization. The greater managerial ownership the less likely is conflict of interest over the accounting choice because the stock price

e f f e c t is m o r e l i k e l y t o d o m i n a t e t h e c o m p e n s a t i o n e f f e c t . T h u s i n c r e a s e incentive for opportunistic

ownership is low (Warfield

behavior when

managerial

el al., 1995).

Managers across firms may be have the same incentive to do manage earnings, but the opportunity to do so may be available only in some firms, or the o p p o r t u n i t y i s a v a i l a b l e t o a l l f i r m s b u t t h e e x t a n t t o w h i c h it c a n b e d o n e d i f f e r across firms. Trueman and Titman (1988) and Dye (1988) present analytical

model have demonstrated that the existence of information asymmetry between

f i r m m a n a g e m e n t a n d f i r m s h a r e h o l d e r is a n e c e s s a r y c o n d i t i o n f o r t h e p r a c t i c e of earnings management. Firms with relatively more investment opportunity set, which largely comprised of intangible growth options more difficult to monitor, or less observable. On the other hand, if firm is comprised largely of asset-in place it is relatively easy for outsider to monitor. Thus the asymmetric information could be relatively larger for firms with relatively more investment opportunity set than firms with relatively more asset-in place (Ambarish

et al.,

1987; Skinner, 1993). The incentive may be the same anytime, but the opportunity to manage earnings may be hampered if the firm largely comprises

a s s e t - i n p l a c e , w h i c h is r e l a t i v e l y e a s y m o n i t o r e d b y o u t s i d e r s . T h i s s u g g e s t s hypotheses:

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H 1: T h e h i g h e r l e v e l o f t h e f i r m ’ s i n v e s t m e n t o p p o r t u n i t y s e t , t h e g r e a t e r o f t h e positive

in the magnitude of earnings management. H2: The higher level of the firm’s investment opportunity set, the greater of the negative impact of firm size in the magnitude of earnings management. H3: The higher level of the firm’s investment opportunity set, the greater of the

impact of financial

leverage

p o s i t i f i m p a c t o f p u b l i c o w n e r s h i p o f f i r m o u t s t a n d i n g s t o c k in t h e magnitude of earnings management.

Research Method

Variables and Measurement

Variables are discretionary accruals, investment opportunity set, financial leverage, firms size, and proportion of public ownership of firm outstanding

stock. This study focuses on discretionary accrual as measure of earning management.

Measure of earnings management, discretionary accrual or m a n a g e d a c c o u n t i n g a c c r u a l , is e s t i m a t e d u s i n g t h e e x p e c t e d n o r m a l a c c r u a l from total accounting accrual. Expected accounting accrual is estimated using

c r o s s - s e c t i o n a l a p p r o a c h . M e a s u r e s o f e x p e c t e d a c c o u n t i n g a c c r u a l u s e d in t h i s study are estimated using modification of the Jones (1991).

This study use common factor analysis to decompose each individual measure into one factor common to the individual measures opportunity set. This study

use among the investment opportunities set proxies that commonly used, these are ratio of

market to book assets, ratio of market to book equity, ratio of market to book fixed assets, the earnings to price ratio, and ratio of capital expenditure to book assets. The level of financial leverage is used as proxy for the existence and tightness of accounting based debt covenant (Duke and Hunt,

1990; and Press and Weintrop, 1990). This study use total debt to book assets ratio as a measure of financial leverage. Firm size is measured by natural log of total assets. The level of public ownership is computed as

percent of outstanding shared owned by public.

Models

This study propose the following model to test the moderating effect of investment opportunity set on the relation between leverage, managerial

ownership, and size, and the magnitude earnings management.

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Model 1:

fh UKR„ -/? < PKP„ + /? , IOS„ + £„ ( 1)

A A M , = ft, + /3, UTBA„ +

Model 2:

AAM„ =fi, + p , JJTBA,, + p 2 UKR„ + p 3 PKP„ + p 4 /OS,, + PiUTBA,, *IOS„ + p 6UKR„ *IOS„ 4

PtPKP„ *IOS„ +e„ (2)

w h e r e M A A i s t h e m a n a g e d ( d i s c r e t i o n a r y ) a c c o u n t i n g a c c r u a l ; l O S is t h e l e v e l o f i n v e s t m e n t o p p o r t u n i t y s e t ; U T B A is f i n a n c i a l l e v e r a g e ; U K R is f i r m s i z e : and PKP is proportion of public ownership of firm outstanding stock. The level of discretionary' accrual serves as measure the extent that managers manage reported income.

1 h e h y p o t h e s e s ( H I. 112, a n d H 3 ) w i l l b e t e s t e d b y e s t i m a t i n g / ? i .

p,„ and p- in

Model 2. If /?,-(+),

p () (-) and /?-(+) arc statisticall\ significant at the level of 5%.

H 0 | . H o 2. a n d H 0i a r e r e j e c t e d , r e s p e c t i v e l y . R e j e c t i n g H 0 | , H 02, a n d H u;, I n d i c a t e there are a moderating effect of investment opportunity set on the association between financial leverage, firm size, public ownership and the magnitude of earnings management.

Data and Sample

f o l l o w i n g c r i t e r i a : 1) F i r m s a r e c a t e g o r i z e in m a n u f a c t u r i n g f i r m ; 2 ) F i r m s a r e listed in JSX since the first January of 1997; 3) Firms are belong to specific

4) firms publish complete financial statement for period 1997-2000.

i n d u s t r y in m a n u f a c t u r i n g w h i c h h a v e a t l e a s t s e v e n m e m b e r s : a n d

Result

Analysis of Investment Opportunities Set Proxies

I h i s r e s e a r c h f o l l o w s g e n e r a l s t e p s in a p p l i c a t i o n o f f a c t o r a n a l y s i s t e c h n i q u e s

a s in H a i r

et al. ( 1 9 9 5 ) . B a s e d o n f a c t o r a n a l y s i s , o n e r e p r e s e n t a t i v e f a c t o r is

extracted from a set of investment opportunity proxy variables. Factor score for

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8 The E ffec t o f In vestm en t O pportunity .

one representative factor replace original investment opportunity set variables

f o r u s e in s u b s e q u e n t m u l t i v a r i a t e a n a l y s i s .

T a b le 1

Panel A. Measure o f Sampling Adequacy

Panel B. Bartlett’s Test o f Sphericity

2000 Bartlett’s test

Year 1997 Variable

NPBE ATBA

Year 1998 Variable

NPBE ATBA

Year 1999 Variable

HSLS ATBA

Year 2000 Variable

NPBA NPAT

a M easures o f S am pling A dequacy (MSA) "‘ S i g n i f i c a n t a t t h e l e v e l s 1%

* Significant at the levels 5%

w h e r e : H S L S i s e a r n i n g s t o p r i c e r a t io , N P B E is r a t i o o f m a r k e t t o b o o k e q u i t y , N P B A is r a t io o f m a r k e t t o b o o k f i x e d a s s e t s , A T B A r a t io o f c a p i t a l e x p e n d i t u r e t o b o o k

a s s e t s . N P A T r a t io o f m a r k e t t o b o o k f i x e d a s s e t s

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Descriptive Statistics

Table 2 show descriptive statistics for variables of this study.

Table 2

Descriptive Statistics

Variable N

Mean

Median

Standard deviation

Where: AAM = Discretionary accruals (%), IOS = Investment opportunity set (index), UTBA = Financial leverage (%), UKR = firm size (loglO, rupiah), PKP = public ownership (%).

Mean and median values for: a) discretionary accruals are 3,68% and 2,83% from total assets in beginning period; b) investment opportunity set are -0,055 and -0,108; c) financial leverage are 81,62% and 76,98%; d) firm size (in natural log value) are 11,668 rupiahs and

11,590 rupiahs; and e) public ownership of firm outstanding stock are 27,38% and 26,45%.

Hypotheses Testing

Table 3 show the result of multiple regression The calculated F value of Model 1 is 4 , 4 1 4 a n d p r o b a b i l i t y v a l u e o f it is 0 , 0 0 2 , s t a t i s t i c a l l y s i g n i f i c a n t a t l e v e l o f

5 % . T h e c a l c u l a t e d F v a l u e o f M o d e l 2 i s 3 , 4 3 9 a n d p r o b a b i l i t y v a l u e o f it is 0,001, statistically significant at level of 5%. Based on the assumption test, all models are free from multicollinearity,

heteroscedasticity, and autocorelation. Relying on

central limit theorem , this study can use normality assumption. There

for, the usual test procedures are still valid asymptotically

The coefficients of investment opportunity set are 0,010 in Model 1 and 0,002 in M o d e l 2 . T h e c a l c u l a t e d t v a l u e a n d t h e p r o b a b i l i t y v a l u e o f t h e s e c o e f f i c i e n t s

a r e 2 , 6 1 9 a n d 0 , 0 0 5 in M o d e l I , a n d 0 , 0 1 8 a n d 0 , 4 9 8 in M o d e l 2 . I n c o n c l u s i o n .

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10 The E ffect o f In vestm en t O pportu nity .

a t t h e o n e - s i d e l e v e l o f s i g n i f i c a n c e 5 % t h a t c o e f f i c i e n t in M o d e l 1 i s s t a t i s t i c a l l y s i g n i f i c a n c e , b u t in M o d e l 2 it i s n o t s t a t i s t i c a l l y s i g n i f i c a n c e . T h e r e s u l t o f

a n a l y s i s b a s e d o n M o d e l 1, t h e f i n d i n g c o n s i s t e n t w i t h G u l

et al. (2000) that

investment opportunity set is positively associates with earnings management. Overall, this result support argument that investment opportunity set moderate

the association of incentives and the magnitude of earnings management.

The coefficient of interaction between financial leverage and investment o p p o r t u n i t y s e t i n M o d e l 2 i s 0 , 0 1 0 . T h e c a l c u l a t e d t v a l u e o f t h i s c o e f f i c i e n t is

1 , 6 6 1 a n d t h e p r o b a b i l i t y v a l u e o f it i s 0 , 0 4 9 . A t t h e o n e - s i d e s i g n i f i c a n c e l e v e l 5%, H0| is rejected. Rejecting of H0| means that empirical evidence support the hypothesis that the higher level of the firm's investment opportunity set, the

g r e a t e r o f t h e p o s i t i v e i m p a c t o f f i n a n c i a l l e v e r a g e in t h e m a g n i t u d e o f e a r n i n g s management.

The coefficient of interaction between firm size and investment opportunity set in M o d e l 2 is - 0 , 0 0 1 . T h e c a l c u l a t e d t v a l u e o f t h i s c o e f f i c i e n t i s - 0 , 1 5 7 a n d t h e

p r o b a b i l i t y v a l u e o f it i s 0 , 4 5 8 . E v e n a t t h e o n e - s i d e s i g n i f i c a n c e l e v e l 1 0 % , H 02

i s n o t r e j e c t e d . N o t r e j e c t i n g o f H 02 m e a n s t h a t e m p i r i c a l e v i d e n c e d o e s n o t s u p p o r t a r g u m e n t t h a t t h e h i g h e r l e v e l o f t h e f i r m ’s i n v e s t m e n t o p p o r t u n i t y s e t , t h e g r e a t e r o f t h e n e g a t i v e i m p a c t o f f i r m s i z e in t h e m a g n i t u d e o f e a r n i n g s management.

The coefficient of interaction between public ownership of outstanding shares

a n d i n v e s t m e n t o p p o r t u n i t y s e t in M o d e l 2 is 0 , 0 3 2 . T h e c a l c u l a t e d t v a l u e o f t h i s

c o e f f i c i e n t i s 2 , 1 4 6 a n d t h e p r o b a b i l i t y v a l u e o f it i s 0 , 0 3 3 . A t t h e o n e - s i d e s i g n i f i c a n c e l e v e l 5 % , H 03 is r e j e c t e d . R e j e c t i n g o f H 03 m e a n s t h a t e m p i r i c a l evidence support the hypothesis that the higher level of the firm’s investment opportunity set, the greater of the positive impact of public ownership of o u t s t a n d i n g s h a r e s in t h e m a g n i t u d e o f e a r n i n g s m a n a g e m e n t

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The In tern a tio n a l J o u rn a l o f A c co u n tin g a n d B u sin ess S o ciety 11

Table 3

Result of Multiple Regression

Model

1 : AAM,, = f3„ + [J, UTBA,, +

fc UKR,, +p3 PKP,, + p 4 IOS,, +£„

Model 2:

A AM,, =j% + /?, UTBA,, + p 2 UKR„ + p 3 PKP,, + p 4 IOS,, + p,UTBA,, *IOS„ + p 6UKR„ *IOS„ + p,PKP„*10S„ +e„

p - value Model 1

0,000*’* P K .P

R2(Adjusted)

0 ,0 0 5 * ' *

F 0,048 (0,037)

0 ,0 0 0 * * * UTBA*IOS

0.150 UKR*IOS

0,358 PKP*10S

R2 (Adjusted)

tn 3 ,4 3 9 * * * _ .---- — -----------

Significant at the levels 1% Significant at the levels 5% Significant at the levels 10%

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12 The E ffect o f In vestm en t O pportu nity .

Concluding Remarks

Based on result and analyses of sample this research concludes the following. Firstly, empirical evidence show that there are positive discretionary accruals.

T h e f i n d i n g s u p p o r t a r g u m e n t t h a t e a r n i n g s m a n a g e m e n t i s c o m m o n p r a c t i c e in general situation. Secondly investment opportunity set positively associate with discretionary accruals. The high level of investment opportunity set indicate the high level of asymmetry information, mean of bid ask spread (as proxy for asymmetry information) for high investment opportunity firm is 1.327,15

and 227,65 for low investment opportunity set. Than the Finding support prediction of this study that the higher of investment opportunity set the wider of

management opportunity to manage their earnings. Thirdly, based on of moderating effect analysis of investment opportunity set on the association of incentives and magnitude of earnings management, this result show that higher

the investment opportunity set level the greater of positive effect financial leverage and public ownership of outstanding shares on magnitude of earnings management.

Suggestion

This research show empirical evidence of earnings management practice among listed company in Jakarta Stock Exchange. The refinement of this research might investigate special component of accruals. Investigation of special accruals that management used to engage earnings management would be valuable for standard setter in identifying the standard which need for evaluation. Further research can use others factor that would limit the ability of manager to manage

their earnings. If earnings management can be limited by transparence of financial reporting environment, than further research can investigate the effect

of auditor quality on earnings management.

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