The Effects of Fair Disclosure Level on Earnings Management －Focus on Fair Disclosure on Future Plan and Business Performance－
Asian Tax Journal Vol. 16 No. 3 (2015), pp. 45-72
Abstract
For the purpose of improving the accounting transparence and reducing information asymmetry, Fair Disclosure Regulation was adopted and enforced on November 2002. Following this, managers’ performance will be known and from the demands of stakeholder about managers’ disclosure, the level of fair disclosure will be increased. Therefore, in firms where the higher pressure of disclosure about manager the monitoring mechanism about manager will be stronger. Accordingly, because the attention about earnings is higher than firm value, so manager will choose the safety earnings management method even though it somewhat reduces firm value. Manager can choose earnings management method as Accruals based earnings management or Real activity earnings management. Accruals based earnings management is the method that occurs from manipulation of earnings through differential accounting recognition and real activity earnings management is the method that occurs from manipulation of earnings through firm’s real activity like as sales, production, discretionary expense. Thus, because the first earnings management method is a traditional earnings management method, so to contain this, several systems are continuously improved and although this is easily exposed by auditors, regulators and analysts it does not give bad influence on firm value in long－term. On the other hand, in the second earnings management method, because firm’s real operation activity is considered as manager’s share so exposed probability is small but this can give bad influence on firm value in long－term. Accordingly, manager may choose the one of these both of earnings management methods when they decide to manipulate earnings. In this thesis, I focus on investigating whether manager uses differential earnings management method following to the level of Fair Disclosure. Base on data samples from 2004 to 2012 that are public on TS2000, I take an empirical exam according to Fair Disclosure. The results are summarized as following, first, for full sample, earnings management variable that measured by accruals shows un－significantly negative coefficient. But, for the fair disclosure firms sample, earnings management variable that measured by accruals shows significantly negative coefficient. This means that earnings management through accruals in fair disclosure firms is smaller than others. Second, in both of full sample and fair disclosure sample, the earnings management variable that measured by real activity shows significantly positive coefficient. This means that, in firms that have high level of fair disclosure, manager uses real activity as a method for earnings management action. Overall, the empirical results show that manager chooses differential earnings management methods which depend on level of fair disclosure and this is consistent with hypothesis. The empirical results of this thesis supply usefully information for regulators and accounting information users about considering accounting numbers that reported by firms’ manager. Thus, the purpose for adoption of Regulation Fair Disclosure is to improve accounting transparence and mitigate information asymmetry. But following this, manager has tend to avoid accruals based earnings management as a earnings management method that was often showed in prior researches, he chooses real activity earnings management as a differential method to manipulate earnings target.
Keywords
- fair disclosure
- earnings management
- real activity earnings management
- accrual based earnings management
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