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Hybrid Earnings Management in the Pre- and Post-SOX

Author

Listed:
  • Lianzan Xu
  • Francis Cai
  • Ge Zhang

Abstract

Purpose: This paper examines a fourth method of earnings management: the hybrid method. Design/Methodology/Approach: The hybrid method uses a combination of the three well-documented earnings management methods of accrual-based, real activity, and classification shifting to manipulate earnings for the benefits of the management and the company. The manipulated number is presented in the income statement as a single line item such as pension expense or income. The hybrid method is more deceptive and harder to detect outright because it is more complex and often apparently GAAP compliant. Findings: The hybrid earnings management method is potentially even more harmful than the three well-known methods, causing severe misrepresentation to the economic reality of a company. Practical Implications: Market participants and other financial data users should be on alert for the hybrid method which appears GAAP compliant but distorts the earnings picture of a company. Originality value: This paper is the first to suggest and investigate the fourth earnings management method - the hybrid method - and opens the door for more research on this pervasive, damaging, and deceptive method of earnings management.

Suggested Citation

  • Lianzan Xu & Francis Cai & Ge Zhang, 2022. "Hybrid Earnings Management in the Pre- and Post-SOX," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 12(1), pages 22-36.
    • Handle: RePEc:ers:ijfirm:v:12:y:2022:i:1:p:22-36
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    References listed on IDEAS

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    1. Vidhi Chhaochharia & Yaniv Grinstein, 2007. "Corporate Governance and Firm Value: The Impact of the 2002 Governance Rules," Journal of Finance, American Finance Association, vol. 62(4), pages 1789-1825, August.
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    3. Roychowdhury, Sugata, 2006. "Earnings management through real activities manipulation," Journal of Accounting and Economics, Elsevier, vol. 42(3), pages 335-370, December.
    4. Daniel Bergstresser & Mihir Desai & Joshua Rauh, 2006. "Earnings Manipulation, Pension Assumptions, and Managerial Investment Decisions," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(1), pages 157-195.
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    More about this item

    Keywords

    Earnings management; hybrid earnings management; pension accounting; SOX.;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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