TY - JOUR
T1 - The influence of public equity ownership on earnings management through the manipulation of operational activities
AU - Kim, Yura
N1 - Publisher Copyright:
© Copyright by author(s).
PY - 2014
Y1 - 2014
N2 - This paper examines whether public equity firms and private equity firms with public debt exhibit different degrees of real earnings management, defined as the manipulation of operational activities in order to influence reported earnings. Public equity firms face intense capital market scrutiny that their private equity counterparts do not. Therefore, this study’s comparison of the two types of firms provides insight on the impact of capital market pressure on real earnings management behaviors. My results show that public equity firms are more likely than private equity firms to opportunistically alter normal operations to improve earnings by pushing sales through discounts and promotions, and by lowering costs of sales through overproduction. I find no difference in abnormal discretionary expenses between public equity and private equity firms. Although private equity firms with public debt do not face the same capital market pressure that public equity firms face, they are not immune from incentives to engage in real earnings management. Specifically, I find that private equity firms with public debt engage in real earnings management as their debt moves closer to default. Moreover, private equity firms with public debt that do engage in real earnings management appear to emphasize the zero earnings benchmark, consistent with prior research, suggesting that this benchmark is of primary importance to creditors.
AB - This paper examines whether public equity firms and private equity firms with public debt exhibit different degrees of real earnings management, defined as the manipulation of operational activities in order to influence reported earnings. Public equity firms face intense capital market scrutiny that their private equity counterparts do not. Therefore, this study’s comparison of the two types of firms provides insight on the impact of capital market pressure on real earnings management behaviors. My results show that public equity firms are more likely than private equity firms to opportunistically alter normal operations to improve earnings by pushing sales through discounts and promotions, and by lowering costs of sales through overproduction. I find no difference in abnormal discretionary expenses between public equity and private equity firms. Although private equity firms with public debt do not face the same capital market pressure that public equity firms face, they are not immune from incentives to engage in real earnings management. Specifically, I find that private equity firms with public debt engage in real earnings management as their debt moves closer to default. Moreover, private equity firms with public debt that do engage in real earnings management appear to emphasize the zero earnings benchmark, consistent with prior research, suggesting that this benchmark is of primary importance to creditors.
KW - Capital Markets
KW - Earnings Management
KW - Private And Public Firms
KW - Real Activities Management
UR - http://www.scopus.com/inward/record.url?scp=84908451225&partnerID=8YFLogxK
U2 - 10.19030/jabr.v30i6.8898
DO - 10.19030/jabr.v30i6.8898
M3 - Article
AN - SCOPUS:84908451225
SN - 0892-7626
VL - 30
SP - 1837
EP - 1862
JO - Journal of Applied Business Research
JF - Journal of Applied Business Research
IS - 6
ER -