Short Selling and Trade-Off between Real Activities Manipulation and Accrual-Based Earnings Management

• In Event: Potpourri

Abstract

We use a sample of short selling firms whose stocks were selected in a Securities and Exchange Commission’s (SEC) pilot program implemented during 2005-2007, under Rule 202T of SEC Regulation SHO, to investigate whether managers make trade off decisions between real activities manipulation and accrual-based earnings management. We find that managers of short selling firms do not trade-off between real and accrual-based earnings management. Instead, they use both the approaches of earning management simultaneously. The evidence suggests that their decision to use accruals management depends to some extent on market share and the operating cycle of the firm. On the other hand, the managers do not take into consideration the operating cycle as the cost factor in real earnings management. Our results also show that pilot firms and a control sample of firms over the period of 2000-2015 do consider the relative cost of earnings management and they use the two earnings management approaches together. Our findings are, therefore, not supportive of Zang (2012) that firms trade-off between real activities and accrual-based earnings management.

Authors

• Pervaiz Alam, Kent State University

• Meiying Hua, Kent State University