A Study on the Effect of Business Scoring System on Accrual Earnings Management and Real Earnings Management
Asian Tax Journal Vol. 21 No. 4 (2020), pp. 183-214
Abstract
This study examines the effect of the business scoring system, which is a financial ratio relative to other firms in the same industry, on accrual earnings management and real earnings management. This study also examines how the incentive of avoiding losses affects the relationship between the business scoring system and earnings management. The empirical results are as follows. First, firms recording high value of business scoring system are less likely to engage in upward accrual earnings management. Second, the negative effect of the business scoring system on upward accrual earnings management is alleviated as the incentive of loss avoidance increases. Third, firms recording high value of business scoring system are less likely to engage in upward real earnings management. Fourth, the negative effect of the business scoring system on upward real earnings management is alleviated as the incentive of loss avoidance increases. The contribution of this study is in two folds. First, previous studies suggest that the construction industry aggressively adjusts earnings upward in order to receive a high value on construction ability evaluation without measuring the business scoring system. However, this study directly measures the business scoring system determined by the financial factors and empirically analyzes the differential effect of business scoring system on earnings management. Second, this paper delivers policy implications in that firms in regulative industries have incentives to engage in earnings management when facing with regulations. In general, the financial industry is known as a representative receiving a lot of government regulations. However, the estimated value of construction ability evaluation applied to the construction industry can be regarded as a direct financial regulation related to the order amount. Most of the previous studies on regulatory policy and earnings management have been conducted on financial institutions, but this study has been extended to other industries such as construction industry.
Keywords
- Construction industry
- Estimated value of construction ability evaluation
- Business scoring system
- Accrual earnings management
- Real earnings management
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