Accrual-based and real earnings management: The relationship with future profitability of Russian companies

Abstract

Goal: the goal of the paper is to investigate the relationship between accrual-based and real earnings management and subsequent profitability of Russian companies.

Methodology: the object of research are Russian public non-financial companies that prepare financial statements under International Financial Reporting Standards. The period of observation is from 2011 to 2020. The main method of research is panel-data regression analysis. Corporate profitability was assessed via return on assets adjusted for the industry median. Earnings management was measured with the binary variables that were assigned a value of “1” if the level of real or accrualbased earnings management for any firm-year was higher than the selected threshold. The effect on profitability was tested not only for the year next to the one when earnings manipulation occurred, but also for two and three years thereafter.

Findings: results showed that real earnings management negatively influences next year profitability. However, no conclusion was made regarding accrual-based earnings management, since the results obtained were not robust to the selection of different thresholds. Companies that displayed higher levels of both accrual-based and real earnings management showed no significant difference in subsequent profitability compared with companies that display lower levels of both accrual-based and real earnings management.

Originality and contribution of the authors: this research is the first study to investigate the association between earnings management and corporate profitability of Russian companies. Moreover, the paper provided additional evidence to the opportunistic view on earnings management, at least in regards to real earnings management. From the practical standpoint, the results obtained might be helpful for internal stakeholders of a company such as management and board members as well its external stakeholders. Managers are advised to consider that utilizing real earnings management might have deferred implications and negatively impact the next year company’s profitability. Board members can be given a recommendation to tighten oversight in relation to real earnings management practices. External stakeholders, e.g., current and potential investors, might also take into account potential effects of earnings management on profitability in course of their investment decisions.