Accrual and Real Earnings Management: One of the Perspectives of Prospect Theory

Imam Subekti

Abstract

Earning management has become the practice in business. Yet, not all of the companies dothis earning management. The study aims to investigate earnings management behavior measured by real and accruals transactions i.e. abnormal cash flow of operation, abnormal production cost, abnormal discretionary, short-term discretionary accruals, and long-term discretionary accruals. The study applies a perspective of prospect theory to predict earnings management behavior of management. In prospect theory, it is predicted that managers tend to manage earnings to avoid negative earnings. Positive earnings around zero is an indication of earnings managed to avoid negative earnings. It shows that most of Indonesian public companies tend to manage earnings based on real transactions than accruals transactions. All proxies of real earnings management support hypotheses that positive earnings around zero are managed through the real transactions. On contrary, only long-term discretionary accruals which support hypothesis revealing that positive earnings around zero is managed through accruals accounts. This result indicates that the Indonesian public companies engage in earnings management in accordance with the predictions of prospect theory, especially those based on real transactions.

Journal of Economics, Business, and Accountancy Ventura
Volume 15, No. 3, December 2012
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