EARNINGS MANAGEMENT THROUGH REAL ACTIVITIES MANIPULATION IN BRAZIL

Abstract

This paper seeks to identify evidence of earnings management through real activities manipulation by Brazilian public held companies. Although there are some research studies in the field of earnings management, which are based on the Brazilian environment, this is the first one that investigates real activities manipulation in Brazil. All others analyze accounting choices for measurement and recognition accounting practices, such as revenue, expenses, assets and liabilities. These studies employ either discretionary accruals econometric models, or asymmetric frequency distribution analyses, or a case studies approach. Using econometric models similar to those developed by Anderson, Banker, and Janakiraman (2003) and Roychowdhury (2005), used by Zang (2005), and the model developed by Kang e Sivaramakrishnan (1995), this paper investigates if Brazilian public companies manipulated accounting information through discretionary accruals (one of the proxies used to identify earnings management), and through real activities decisions. The operational decisions analyzed in this paper are concerned with the Production Levels and with Sales, General and Administrative Expenses. Evidence, from the period 1998-2004, from a sample of 315 companies, non financial nor insurer which stocks are traded at Bovespa, suggested that they manipulated accounting information either through real activities decisions or through discretionary accruals, and that in some cases, these two ways of manipulating accounting information were negatively correlated.