The Trade-Off Between Accrual And Real Earnings Management

In recent years, scholars at home and abroad pay more and more attention to real earnings management. It has become the two main ways to study how firms implement earnings management besides accrual earnings management. At the same time, how to use accrual and real earnings management and what the relationship between the two ways is have become an important topic which researchers focus on. For foreign firms, studies have found that there is a trade-off relationship between the two ways when managers implement them. But for listed firms in China, it still needs to study that whether the relationship between them is the same as foreign.Based on the extant literature, this paper verifies the existence of earnings management and investigates whether managers of small profit firms and small earnings increasing firms trade off between accrual earnings management and real earnings management using China A-share listed firms’financial data in years from2002to2011. The results show that managers’trade-off decisions between the two earnings management are influenced by the costs and timing of earnings management activities. First, the levels of accrual and real earnings management are based on the relative effects of their cost factors. When the effects of accrual cost factors is bigger, managers will use more real earnings management, and vice versa. Second, based on the timing of the two ways, the results indicate a direct substitutive relation between accrual earnings management and real earnings management. In order to achieve the earnings goal, managers adjust the level of accrual earnings management according to the unexpected amount of real earnings management at the fiscal year-end. It is the two decisions that managers made in implementing accrual and real earnings management that compose the trade-off between them. The results provide evidences consistent with the trade-off between the two earnings management, but also have implications for both investors and regulators.