DOES INVESTOR PROTECTION PREVENT EARNINGS MANAGEMENT ACTIVITY THROUGH REAL ACTIVITY MANIPULATION? ASIAN COMPARISON

DOES INVESTOR PROTECTION PREVENT EARNINGS MANAGEMENT ACTIVITY THROUGH  REAL ACTIVITY MANIPULATION?

ASIAN COMPARISON

Abstract

This paper examines systematic differences in earnings management through real activity manipulation across 6 Asia countries. Contrary with Leuz (2003) finding that earnings management through accrual manipulation is lower in economies with high investor protection than in low investor protection. We predict that  in economies with high investor protection, manager prefer to manage earnings through real activity manipulation rather than through accrual manipulation. Because accrual manipulation is more likely to draw auditor or regulator scrutiny than real decisions about pricing and production. Our findings are consistent with our prediction.

          Keyword: earnings management, real activity manipulation, investor protection

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