Using Real Activities to Avoid Earnings Decreases and Losses During Economic Downturns

• In Event: 1.02. Macroeconomic Factors and Earnings Disclosure

Abstract

This study examines the impact of economic downturns on real earnings management
activities in an international setting. Using a sample of 27 countries between 1988 and
2016, I find that during economic downturns, firms tend to rely on real earnings
management to avoid earnings decreases and losses. The results indicate that real earnings
management is used to substitute for accrual-based earnings management. Further, I
demonstrate that real earnings management comes at a high cost. Firms sacrifice future
performance when engaging in real earnings management, and the consequences magnify
during economic downturns

Author

• Hong Kim Duong, Old Dominion University