Background Characteristics Of Top Managers And The Preference Between Real Earning Management And Accrued Earning Management

Earnings management is divided into two approaches:real earning management based on business activities manipulation and accrued earnings management based on accounting system manipulation. Specifically, real earnings management needs various departments of the company, such as sales department, production department, management department, cooperating with each other. Manipulating business activities are more difficult and flexible while the results are much more uncertain. Due to manipulations of the ordinary course of business, the conducts do not violate accounting standards. There are lower degree of market recognition and less relevant regulatory scrutiny and litigation risks. But the manipulations of day-to-day business change the normal business activities, which deviate from the optimal operating policy decisions of the company. Real earnings management proceeds at the cost of the company’s competitive advantage in the future and the enterprise value. It has long-term and severe economic consequences. Therefore, real earnings management is the more aggressive earnings management manipulation. In comparison, accrued earnings management based on accounting system manipulates accounting policies or accounting estimates. The mode of operation is relatively simple and fixed. Also the results are directly and certain. But the constraints of the accounting system and the reversal effect of accrued earnings management lead to operating range limited. Once excessive manipulation violates accounting standards, accrued earnings management is easily recognized by the market and company will assume a higher risk of the external supervise and litigation. Therefore, accrued earnings management is the more traditional earnings management manipulation.Based on upper echelons theory, top managers have a decisive impact on the strategic choices of the company and background characteristics that top managers own play a subtle role in the decision-making behavior. Different background characteristics lead to different psychological preference and response capacity. So facing with different cost of real and accrued earnings management, how do the top managers’background characteristics reflect on the decision-making behavior to choose real earnings management or accrued earnings management? In the face of such doubts, this paper uses a combination of normative and empirical research methods in order to analyzing and solving the problem. And ultimately it finds out the relationship between top managers’background characteristics and the preference between real earnings management and accrued earnings management.This paper is divided into six chapters, each part of the contents are summarized as follows:Chapter one is introduction. It introduces the research background and significance, indicates research ideas to solve the problem, combines normative and empirical methods to form a research framework, and summarizes the contribution and limitations of the research.Chapter two is literature review. The literature review of top managers’ background characteristics shows they have deep impact on the company’s operating decisions, investment decisions, financing decisions. The literature review of the preference between real earnings management and accrued earnings management shows that external influence factors and internal factors affect the choice of two earning managements.Chapter three is theoretical foundation and research hypothesis. It elaborates upper echelons theory and asymmetric information theory, summarizes the top managers’ specific background characteristics, real and accrued earnings management relative characteristics, and combines of both summaries to raise hypotheses that background characteristics of top managers effect the decision between real and accrued earnings management.Chapter four is research design. It explains real and accrued earnings management measurement models. Based on original earnings management degree evaluation method it sets up a relationship index between real and accrued earnings management to check out the hypotheses. Then it describes the definition of the relevant variables to build the research regression model and indicates the sample selection method and data sources. Chapter five is empirical analysis. The empirical test is divided into two phases:the first phase needs the top managers’ background characteristics testing with real and accrued earnings management individually; the second stage needs top managers’background characteristics testing with the relationship index to improve the preference further. Then, according to the score of the extent of earning management it categorizes samples and has robustness tests to ensure the empirical results more convincing.Chapter six is conclusions and policy recommendations. The conclusions as the follows:lower the average age, higher male top managers’ ratio, shorter the average tenure and higher the average degree of top managers tend to choose the ways of real earnings management. The policy recommendations are building top managers’ team needs to considerate that the background characteristics of top managers should match corporate strategy and regulating corporate earnings management behavior. At the end of this paper is looking forward the future research direction.The contribution of this article is that firstly, original earnings management degree evaluation method and setting up a relationship between real and accrued earnings management are breakthrough in the field of earnings management, which have widen theorists’ideas to develop new methods for related issues. Secondly, comparative summary of the characteristics of the two earning managements by category enrich the literature about real and accrued earnings management associated and considerations about top managers’characteristics providing a reference for comprehensive study of two earning managements.