Uncovering real earnings management: Pay attention to risk-taking behavior

Samar Alharbi, Md Al Mamun, Nader Atawnah

Research output: Contribution to journalArticlepeer-review

8 Citations (Scopus)

Abstract

We examine the impact of corporate risk-taking on firm-level real earnings management. We find that firms with higher risk-taking engage in higher real earnings management. Our results are robust to a series of robustness tests, including simultaneous least squares approach, firm fixed effect, change analysis, and pseudo difference-in-difference analysis. Additional analyses reveal that the impact of risk-taking on real earnings management is more pronounced among firms that experience prior-year loss and are run by top-echelons who are risk lovers. Sarbanes-Oxley Act (SOX) regulation does not attenuate the positive effect of risk-taking on real earnings management. However, external monitoring by institutional investors and takeover susceptibility curb the relation between risk-taking and real earnings management. Our study highlights that outsider, such as investors and regulators, should pay close attention to a firm’s risk-taking behavior to unravel the extent of real earnings management in the firm.

Original languageEnglish
Article number53
JournalInternational Journal of Financial Studies
Volume9
Issue number4
DOIs
Publication statusPublished - Dec 2021
Externally publishedYes

Keywords

  • Agency theory
  • Corporate governance
  • Real earnings management
  • Risk-taking

ASJC Scopus subject areas

  • Finance

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