Earnings Management to Achieve the Peer Performance Benchmark

Authors

Sheng Yi, Florida International UniversityFollow

Document Type

Dissertation

Degree

Doctor of Philosophy (PhD)

Major/Program

Accounting

First Advisor's Name

Abhijit Barua

First Advisor's Committee Title

Committee Chair

Second Advisor's Name

Clark M. Wheatley

Second Advisor's Committee Title

committee member

Third Advisor's Name

Jung Hoon Kim

Third Advisor's Committee Title

committee member

Fourth Advisor's Name

Jonathan Milian

Fourth Advisor's Committee Title

committee member

Fifth Advisor's Name

Qiang Kang

Fifth Advisor's Committee Title

committee member

Keywords

Peer Performance, Earnings Benchmark

Date of Defense

6-16-2016

Abstract

Other than three extensively researched earnings thresholds, avoiding earnings declines, avoiding negative earnings and avoiding negative earnings surprises (Burgstahler and Dichev 1997; Degeorge, Patel, and Zeckhauser 1999), peer performance is an additional threshold that is often mentioned in news reports, compensation contracts and analysts’ reports, while largely ignored in the academic research. Thus, I examine whether firms manage earnings to achieve peer performance. First, I examine accruals-based earnings management to achieve peer performance. The empirical results show that firms exhibit more income-increasing accruals management in the current year under the following situations: 1) when firms’ prior year performance is below that of their peer group; 2) when firms’ average performance over the prior two years is below that of its peer group; 3) when firms’ expected performance is below its peer group’s expected performance. In addition, firms with cumulative performance that is lower than that of its peer group through the first three quarters of the fiscal year exhibit more upward accruals management in the fourth quarter. Second, I investigate real activities manipulation to achieve peer performance. The empirical results show that that firms exhibit more income-increasing real activities manipulation in the current year under the following situations: 1) when firms’ prior year performance is below that of their peer group; 2) when firms’ average performance over the prior two years is below that of its peer group. Third, firms that are under pressure to achieve peer performance benchmarks tend to restate financial statements in subsequent years. Specifically, firms under the following four situations are more likely to restate current earnings in the future: 1) firm’s prior year performance is below that of its peer group; 2) firm’s average performance over the prior two years is below that of its peer group; 3) firm’s expected performance is below that of its peer group; and 4) firm’s cumulative performance for the first three fiscal quarters is below that of its peer group. The influence of peer performance on earnings management behavior implies that relative performance evaluation can induce income-increasing earnings management and subsequent restatements.

Identifier

FIDC000706

Recommended Citation

Yi, Sheng, "Earnings Management to Achieve the Peer Performance Benchmark" (2016). FIU Electronic Theses and Dissertations. 2619.
https://digitalcommons.fiu.edu/etd/2619