The Influence Of Real Activities Manipulation Upon Future Performance

With accounting standards improving, the accounting flexibility has been greatly damaged, which deters the accrual-based earnings management companies used to adopt. Meanwhile, the implementation of SOX heightened scrutiny of accounting practice, rendering accrual-based earnings management more risky. Due to the declining accounting flexibility as well as the increasing risk of accrual-based earnings management, real activities manipulation (RM) is preferred by the management. RM includes varieties of methods, such as expenses manipulation, production manipulation, sales manipulation, etc., aimed at obscuring or masking the true economic performance.The research, based on the evidence from companies meeting meager-profit benchmark, explores the influence of real activities manipulation upon future performance. Based upon the data analysis, some conclusions are drawn as following. Strikingly, there exist abnormal low discretionary expenses and abnormal high production costs among companies meeting meager-profit benchmark, which exhibits strong evidence of expenses manipulation and production manipulation. Also it gives credence to the non-existence of sales manipulation among companies meeting meager-profit benchmark. Besides, the research finds that real activities manipulation firms adopt to attain meager profit, is unrelated to future performance. The dissertation is structured as following:Chapter1Introduction:The chapter gives detailed accounts of the research background, significance, methods and framework. Also innovations of the thesis are demonstrated in the chapter as well as its limitations.Chapter2Related Literature:The chapter elaborates on the literature about RM, including its definition, methods as well as motivations. Following this, the researches about the relation between RM and future performance are summarized.Chapter3Research Design:This chapter introduces the relative theories first, and proposes research hypothesis based on the theories introduced. Then define variables used in empirical models and build research models to make regression analysis.Chapter4Empirical Analysis:This chapter makes empirical analysis with Stata12.0to test the hypotheses proposed in chapter3. Besides, the robustness of the empirical analysis is tested in order to raise the reliability of empirical results.Chapter5Conclusion and Prospect:This chapter makes a conclusion of the thesis, ending with the limitations of the research as well as the future research prospect of the subject.The prevalence of research on earnings management makes the availability of the literature on accrual-based earnings management easy. Despite extensive literature on accrual-based earnings management, literature on real activities manipulation is deficient. Probably, my dissertation can contribute to the research on real earnings management, functioning as some reference. Distinguished from domestic researches conducted, which abides by the research logic such as "Motivationâ†'The existence of real earnings management" or "Real earnings managementâ†'Economic consequences", the essay attempts to make the research logic more complete by building the research logic "Motivationâ†'The existence of real earnings managemenâ†'Economic consequences". Adhering to the research logic I proposed, the thesis explores the relation between real activities manipulation and future performance based on the evidence of firms meeting meager-profit benchmark.