Determinants of Earnings Management Choice among Publicly Listed Industrial Firms in the Philippines

Cynthia  P. Cudia,; Aeson Luiz  C. Dela Cruz,

Determinants of Earnings Management Choice among Publicly Listed Industrial Firms in the Philippines

Cynthia P. Cudia | Aeson Luiz C. Dela Cruz

Abstract:

Abstract: Earnings management involves the use of acceptable accounting rules and procedures as well as circumventing business activities to achieve desired ends. In the literature, earnings management through discretionary accruals has always been associated with an opportunistic motive to mislead various stakeholders about a business’ financial performance to the advantage of owners and managers. However, the literature presented two possible motives behind earnings management, namely: an opportunistic, a self-serving perspective which mirrors the agency problem; and an efficient motive which utilizes earnings management as a signalling mechanism to send signals about the firm to its stakeholders. In this paper, we investigate the type of earnings management employed by industrial firms in the Philippine Stock Exchange (PSE). Evidence was found that managers use earnings management in an efficient perspective to signal private information to stakeholders. In addition, the study examined firm-specific characteristics in terms of profitability, leverage, cash flows from operations, and firm size. Furthermore, this study also examined corporate governance variables such as the number of independent board of directors, the presence of CEO duality, board size, and audit quality. We also examined the effect of these variables on a firm’s tendency to engage in earnings management using discretionary accruals. Results revealed that among the firm specific characteristics, leverage and cash flow from operations are both significantly and positively related to a firm’s level of discretionary accruals, while profitability was found to be negatively related. However, we found that corporate governance variables such as board size, board independence, CEO duality, and audit quality were all insignificant predictors of a firm’s earnings management activities.