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Self-serving financial reporting communication: A study of the association
between earnings management and impression management
Encarna Guillamon-Saorin*
Universidad Carlos III de Madrid
Beatriz García Osma
Universidad Autónoma de Madrid
August 2010
* Corresponding author: Department of Business Administration, University Carlos III de Madrid, Madrid, 126, 28903 Getafe, Madrid (Spain). Tel: +34 916249642, Fax: +34 916249607, Email: [email protected]
The authors wish to thank Peter Clarkson, S. Brown, Steve Young and participants at the 2010 EAA Annual Congress, Philip Brown, Ann Tarca and participants at the XIV Financial Reporting and Business Communication Conference and AFAANZ 2010 conference for helpful comments and suggestions. We also acknowledge the comments of Jerry and Natalie Gallery and other attendants at the seminar presented at Queensland University Technology in July 2010. We acknowledge financial assistance from the Spanish Ministry of Science and Innovation (ECO2008-06238/ECON, SEJ2007-67582/ECON and ECO2010-19314), ASEPUC and the AECA Carlos Cubillo Chair in Accounting and Auditing.
Self-serving financial reporting communication: A study of the association
between earnings management and impression management
Abstract
Financial reporting communication involves a number of corporate disclosures, both mandatory
and voluntary. In this paper, we take a comprehensive approach to evaluating firm financial
reporting communication strategy and examine the relationship between earnings management in
the audited financial statements and a number of impression management techniques in annual
results press releases. We are interested in assessing the relationship between these two corporate
self-serving reporting practices. Using a sample of Spanish quoted companies for the period
2005-2006 we first show that firms with greater earnings management are less likely to issue an
annual result press release. Amongst those that finally issue a press release, we find evidence that
firms with greater earnings management also show greater impression management, indicating
that managers that engage in self-serving disclosure practices may do so at several levels of firm
communication. According to this evidence, impression management and earnings management
are complementary disclosure practices jointly used to manipulate the perception of outsiders
about corporate performance.
Keywords: earnings managements, impression management, press releases, voluntary
disclosure
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1. Introduction
We study the quality of firm reporting communication strategy. In particular, we analyse the relationship
between earnings manipulation in firm financial statements and self-serving presentation of information
in voluntary disclosures. Earnings management and narrative impression management are expected to be
two related dimensions of managerial opportunistic disclosure behaviour. In particular, we focus on the
extent to which managers manipulate the earnings reported in the financial statements, and how this
impacts on (i) the issuance and (ii) content of annual result (earnings) press releases (ARPR,
henceforth).
When managers manipulate earnings in firm financial statements, the question arises of whether
they shy away from emphasizing (fabricated) firm performance in other corporate communications, such
as the ARPR, to limit visibility and legal liability. Managers may use the discretion allowed by press
releases to support manipulated figures and enhance the positive impression and the credibility of their
disclosures (Aerts and Cheng, 2010). Alternatively, they could try to limit the visibility of manipulated
numbers and minimize impression management in the ARPR, or simply, opt not to issue one. Only the
prior work of Godfrey et al. (2003) and Aerts and Cheng (2010) study this issue in a different setting to
the current work. They show that earnings management is positively associated with the use of graphical
impression management (Godfrey et al., 2003) and with explanatory impression management (Aerts and
Cheng, 2010).
We more directly study the links between earnings management and impression management by
looking at the press release issued by the firm to announce annual earnings. Waterhouse, Gibbins and
Richardson (1993) define as a key issue the channel in which the disclosure is made. Most research
studying earnings announcements as a means of corporate disclosure has focused on quarterly earnings
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press releases (e.g., Bowen et al., 2005; Francis et al., 2002). However, management disclosure strategy
has been proved to be different depending on whether the news being released is quarterly or annual
corporate reports (Skinner, 1994). This study focuses on ARPRs and therefore extends the literature in
this arena2. Prior literature provides overwhelming evidence of managerial manipulation of corporate
information included in press releases as well as the effect of those self-presentation practices on stock
prices (Bowen et al., 2002; Matsumoto et al., 2006; Schrand and Walther, 2000; Staw et al., 1983). In
the context of corporate communication strategy, press releases feature prominently as self-serving
management tools. According to Aerts and Cormier (2009), press releases cover more fragmented issues
and are thus more tactically oriented than annual reports. They include richer information which implies
a higher capacity to establish prominence and change of impressions (Aerts and Cormier, 2009; Daft and
Lengel, 1986). Therefore, press releases are an interesting venue to investigate the links between
impression and earnings management. And particularly, the specific type of press release which is the
focus of our study: annual results (earnings) press releases.
We run our tests for a large sample of Spanish quoted companies for the years 2005 and 2006.
We focus on the case of Spain because behavioural accountability theory suggests that legal and
regulatory mechanisms improve accountability processes and lead to differences in the transparency of
communication activities (Lo, 2008; Weick, 1995). Institutional and market forces, which are different
across countries, influence the quality of the information disclosed by companies (Ball et al., 2000; Ball
et al., 2003; Garcia Lara et al., 2005; Leuz et al., 2003), which is lower in code-law countries where
investor protection is weaker. Additionally, Aerts and Tarca (2010) find evidence that regulatory and
2 Another important stream of the literature has examined impression management in letters to shareholders (for example, Abrahamson and Amir, 1996; Abrahamson and Park, 1994; Clatworthy and Jones, 2003; Smith and Taffler, 2000). However, ARPRs have different goals than letters to shareholders.
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litigation costs across countries determine the level and type of attribution bias included in corporate
reports. Most studies investigating earnings management or impression management focus on USA or
the UK. It is well documented that Anglo-American countries differ from Continental Europe countries
such as Spain in their legal (La Porta et al., 1997; 1998), corporate governance (Shleifer and Vishny,
1997) or reporting system (Doupnik and Salter, 1993; Nobes, 1983). Spain is characterized by a weak
legal environment with low litigation cost and low investor protection (La Porta et al., 2004). Moreover,
the external audit tradition in Spain is lower because statutory audit was not established until 1988 with
the ratification of the Audit Law. Legislation on audit independence is not strict (Cañibano and Castrillo,
1999; Gonzalo, 1995). For example, up to 2004, no actions have ever been taken by a court of law
against Spanish auditors (Ruiz Barbadillo et al., 2004) and, in general, poor quality control characterises
the system (Iribar, 2002). Therefore, Spain provides a natural setting for the study of impression and
earnings management.
Our study contributes to the literature in two main areas. First, we provide evidence of the extent
to which companies use these two self-presentational practices in an environment with low litigation
risk, low level of public enforcement and low rule-making power (La Porta et al., 2004). Second and
more importantly, this research shows how impression and earnings management are used together to
create a more credible positive image of the company. There are few studies to date that take a
comprehensive view of corporate communication strategy and jointly study different tools used by
managers to manipulate firm outsiders. Theoretically, impression management imposes fewer costs on
managers and firms, and should thus be preferred to earnings management. Earnings management may
have costs for directors, auditors and managers in the form litigation and political costs as well as for the
firm, when manipulated accruals reverse, or suboptimal decision making leads to loss of competitive
advantage. However, if used jointly, they may represent a powerful combination for managers to
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mislead firm stakeholders, and have potential economic consequences. Our study thus contributes to
further our understanding of how managers make use of the differing tools available for opportunistic or
informative purposes.
We measure earnings management using accrual-based proxies based on the work of Dechow et
al. (1995), as well as a cash flow-based proxy of real earnings management based on the work of
Roychowdhury (2006). These two forms of earnings management may serve different needs in relation
to the firm’s incentive to meet earnings targets, or the level of regulators’ and auditors’ enforcement
against accrual management (Jian and Wong, 2010). Impression management measurement is based on
the work of Brennan et al. (2009). Our results indicate that companies avoid promoting accrual-based
earnings management by reducing voluntary disclosure (ie., ARPR). However, the information
environment of the firm may be so that it is not entirely in the hands of managers to decide whether to
issue or not an ARPR. For the subset of firms that issue an ARPR the impression management level of
the press release is associated with earnings management practices. In particular, we find evidence of a
positive association between impression management and real activities earnings management, which
are more difficult to detect by auditors or regulators than accruals based earnings management (Cohen
and Zarowin, 2010). We also provide evidence of real earnings management being associated to more
aggressive forms of impression management.
Overall, the evidence suggests that impression management and earnings management are
complementary strategies for a significant part of the sample analyzed, although there may also exist a
subset of managers that prefer to be more subtle in their self-serving behavior, reducing exposure to the
press and the public by limiting other types of disclosures such as ARPRs. It may thus be the case that
there are different managerial styles in place. Also, the evidence can be interpreted as different types of
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earnings management (accruals-based versus real earnings management) being associated to differing
communication strategies or to differing monitoring.
The remainder of the paper is structured as follows. Section 2 reviews the literature and presents
the research questions. Section 3 describes the method and data used to test the predictions. Section 4
presents the main results from the analysis. Finally, section 5 concludes.
2. Literature review and theoretical considerations
Companies operate not as separate legal entities, but rather constitute a ‘nexus of contracts’ between
individuals (Jensen and Meckling, 1976). Agency theory provides the logic and a solid framework to
understand self-serving management behaviour. When shareholders or those acting on their behalf, lack
the motivation or ability to monitor and verify management actions, the later tend to favour their own
interests (Eisenhardt, 1989). This goal maybe achieved using a variety of strategies. For example,
managers may attribute negative outcomes to uncontrollable environmental causes and positive
outcomes to their own actions (Aerts, 2001; 2005; Bettman and Weitz, 1983; Clatworthy and Jones,
2003). In the extreme, managers may conceal negative outcomes completely (Abrahamson and Amir,
1996; Abrahamson and Park, 1994) or use thematic manipulation, selectivity, emphasis and other
presentational techniques to present a positive image of the company performance (for example, Beattie
and Jones, 2000; Brennan et al., 2009; Clatworthy and Jones, 2001; Courtis, 2004). Finally, managers
may manipulate the numbers reported in the financial statements using different techniques (Healy and
Whalen, 1999). However, all this evidence may provide an incomplete theoretical basis for explaining or
predicting management behaviour. Researchers need to consider the ethical dimension of human
behaviour which may provide an important element missing from legalistic and adversarial agency
relationships (Horrigan, 1987).
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The informational perspective (Schipper, 1989) is a key element underpinning the study of the
earnings management phenomenon. This perspective assumes that accounting disclosures have an
information content that provides useful signals to stakeholders. However, the credibility and value of
the information reported by companies is frequently questioned (Anderson et al., 2004; Hodge et al.,
2006). Credibility is determinant in the impression management process and plays a key role on its
effectiveness (Leary and Kowalski, 1990). Under conditions of low external scrutiny with a generally
positive attitude towards management, we can expect an opportunistic behaviour on the part of those
with incentives to present a positive image of the company (Sutton and Galunic, 1996). Moreover, it
may be difficult for stakeholders to detect accounting manipulation, because of insufficient personal
skills, indifference or unwillingness to engage in meticulous analysis (the naïve investor hypothesis)
(Breton and Taffler, 1995). From a market efficiency perspective such failures in understanding may not
matter. Accordingly, Healy and Wahlen (1999) argue that earnings management prior to equity issues
does affect share prices, suggesting that investors do not necessarily see through earnings management.
The research reported in this study is positioned within an informational perspective, explained
by the naïve investor hypothesis; it is based upon the propositions, firstly, that financial reporting does
hold valuable information content, and secondly that distortions in it may not be readily detectable by all
stakeholders.
2.1. Earnings management literature
Earnings management is also referred to as creative accounting, and can be defined as follows.
“Earnings management occurs when managers use judgment in financial reporting and in structuring
transactions to alter financial reports to either mislead some stakeholders about the underlying economic
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performance of the company or to influence contractual outcomes that depend on reported accounting
numbers” (Healy and Whalen, 1999: 368)
The potential for earnings management is found in three principal areas: regulatory flexibility, a
lack of regulation and management discretion in respect of assumptions about the future (i.e. prospective
information). However, even in a highly regulated accounting environment such as the US, a great deal
of flexibility is available (Largay, 2002: 368). Companies can easily implement different earnings
management practices. If the relevant accounting standards are permissive, managers will exploit the
potential for earnings management (Black et al., 1998).
2.1.1 Motivation for earnings management
Inherent to the definition of earnings management is the need of a motive which could be, in general,
either to mislead users or to influence contractual outcomes. Motivation for earnings management is
well developed in the literature, starting from the work of Hepworth (1953). Common reasons for
earnings management are for example, the existence of a gap between the actual performance of the firm
and analysts’ expectations (Healy and Whalen, 1999), to meet benchmarks or targets (Degeorge et al.,
1999; Kasznik, 1999), the link between income measurement and executive compensation (Bartov,
2001; Gaver et al., 1995), the need to reduce the perception of variability in the earnings of the firm
(earnings smoothing) (Trueman and Titman, 1988) or to reduce taxes (e.g. Niskanen and Keloharju,
2000). Contracts with debt holders also provide incentives for managing earnings to avoid violation of
debt covenants or to obtain a favourable credit rating (DeFond and Jiambalvo, 1994; Sweeney, 1994).
There are also regulation related motivations, for example the existence of contracts with
authorities to avoid regulatory intervention (Han and Wang, 1998; Key, 1997). In relation to regulatory-
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related motivation, some studies find that firms may use earnings management to meet regulatory
earnings thresholds and avoid regulatory delisting (Chen and Yuan, 2004; Cheng et al., 2009; Jian and
Wong, 2010).
2.1.2 Accrual-based earnings management versus real activities earnings management
Traditionally, research has focused on earnings management through purely accounting based decisions,
and mainly through the manipulation of accounting accruals (Beneish, 1997; Dechow et al., 1995;
McNichols, 2000), but also, using other accounting-based mechanisms, such as classifying expenses as
extraordinary and thus, below the bottom line. In that line, early work by Barnea et al. (1976) finds
evidence of classificatory smoothing using extraordinary items, and Dempsey et al. (1993) report that
managers tend to include extraordinary gains on the income statement and extraordinary losses on the
statement of retained earnings. Because this type of manipulation is purely accounting based, it is
generally believed to be a less costly form of earnings management (without real business implications),
and thus, preferred by management.
A second type of manipulation is real earnings management (i.e. affecting cash flows), which
involves real decisions such as reducing expenditures on research and development, advertising,
employee training, timing the sale of assets or inflating sales by giving more lenient credit terms. This is
generally believed to be a more costly form of earnings management (Roychowdhury, 2006). Thus far,
most of the literature has focused on studying the accrual-based manipulation, and only recently has
interest started to arise on understanding earnings management through real activities manipulation.
Recent evidence suggests that managers may actually prefer real activities manipulation (Graham et al.,
2005), which although costly, are less likely to be detected by auditors and regulators. The difficulty to
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detect real earnings management is related to the uncertainty inherent in business environment where
there is no benchmark to determine what should have been done in a particular situation (Lo, 2008)3.
Recent research investigates the interrelation and pecking order between accrual and real
activities earnings management (Cohen and Zarowin, 2010; Jian and Wong, 2010). Cohen and Zarowin
(2010) find that the firm choice between these earnings management practices is a function of the firm’s
ability to use accrual management and the costs of doing so. The work by Jian and Wong (2010)
investigates the use of cash-based related sales to manage earnings as a way to reduce the excessive
accruals that would draw auditors´ attention. They argue that the weak monitoring role of Chinese
auditors related to the weak legal environment in the country provides an interesting setting for this
analysis. Chinese firms which are typically group firms can accelerate cash sales to an affiliated firm.
These studies suggest that research should investigate both real as well as accrual-based earnings
manipulation because they may serve different management reporting strategies and act as
complementary or substitute practices.
According to the above discussion we expect that manager’s decision to issue a press release will
be associated with the type of earnings management used. In particular, we expect that accrual earnings
management which is less costly but easy to detect will be negatively associated with the decision to
issue a press release. Accordingly, we pose our first hypothesis as follows.
H1: Companies that engage in accruals earnings management are less likely to issue an ARPR
3 It is difficult to find managers liable in case of bad business decisions because there is no benchmark and because they are protected by the “business judgement rule”. However, other type of earnings manipulation such as accruals management have accounting standards as the benchmark and are subject to scrutiny by auditors and potentially by forensic accountants and court (Lo, 2010).
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2.2. Impression management literature
Impression management originates in social psychology and relates to how individuals present
themselves to others to be perceived favourably (Hooghiemstra, 2000). In corporate reporting,
impression management consists of controlling and manipulating the impression conveyed to users of
accounting information (Clatworthy and Jones, 2001). This implies that managers deliberately engage in
impression management and use corporate reports as vehicles to strategically manipulate the perceptions
and ultimately the decisions of stakeholders (Yuthas et al., 2002).
A significant part of the literature investigating strategic communication of information between
firms and stakeholders is concerned with manipulation of graphs (Beattie and Jones, 1997; 2000; Beattie
and Jones, 2002; Steinbart, 1989). There is also a well developed strand of literature focusing on
narratives. Potentially misleading disclosure practices in narratives have been investigated mostly in
annual reports (Abrahamson and Amir, 1996; Clatworthy and Jones, 2003; Courtis, 1998) but also in
press releases (Bowen et al., 2005; Brennan et al., 2009; Davis et al., 2008). Press releases permit a high
level of management discretion. They include information not reported on the face of the financial
statements (both in qualitative and quantitative format) which allow strategic disclosure practices.
There are different techniques employed in corporate narratives by managers that could lead to
misleading impressions. Prior literature examines the use of positive and negative language in annual
reports narratives (e.g. Abrahamson and Amir, 1996; Abrahamson and Park, 1994; Clatworthy and
Jones, 2003; Davis et al., 2008; Hildebrandt and Snyder, 1981; Smith and Taffler, 2000). The analysis
consists of classifying words into positive and negative to analyze the existence of thematic
manipulation. Other possible misleading disclosure practices using qualitative information involves
repeating information or reinforcing a particular piece of information to make it more obvious to readers
(Brennan et al., 2009).
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A different strand of the literature investigates the format of disclosures (i.e. qualitative vs.
quantitative) as strategic disclosure practices. For example, Gibbins et al. (1990) document that firms
are likely to disclose good news in qualitative format and bad news in quantitative format. Later
research presents evidence of companies using quantitative data to report good news and qualitative
information to report bad news (Skinner, 1994). Consistent with Skinner (1994), Clatworthy and Jones
(2006) find that profitable companies include more quantitative performance references (percentages)
than unprofitable companies in their accounting narratives. The use of a benchmark to emphasize
positive changes in earnings has been investigated as a form of strategic disclosure (Lewellen et al.,
1996; Schrand and Walther, 2000; Short and Palmer, 2003). One type of strategic selection refers to the
use of a specific amount as a benchmark of the change in earnings in an apparent attempt to influence
reader’s perceptions. Schrand and Walther (2000) examine one form of strategic selection where
managers exclude non-recurring items from the prior year benchmark but not from the current year to
show higher changes in earnings. Lougee and Marquardt (2004) show that companies strategically
choose to present pro-forma earnings when their GAAP earnings fail to increase relatively to the prior
period, or do not meet analysts’ expectations.
Similarly, Bowen et al. (2005) find that firms strategically emphasize metrics that allow them to
discuss (in the headlines or in other sections of the earnings announcements) more positive news about
their performance. The managerial practice of reporting a nonstandard or alternative profitability
measure in the same press release as the audited earnings number has drawn considerable attention
(Bhattacharya et al., 2007). Strategic location is also a self-serving presentation practice which has been
investigated in prior literature. This consists on placing the information that managers would like to
emphasize more prominently (Bowen et al., 2005; Brennan et al., 2009; Staw et al., 1983).
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In sum, these studies find systematic evidence of opportunistic management behaviour when
preparing their corporate reports by trying to select the most convenient performance figure to be
included in the report.
2.3. Association between earnings and impression management
Prior research shows that companies use a combination of impression and earnings management
practices in their corporate reports. However, there is very limited prior research investigating the link
between these two practices. Godfrey et al. (2003) report evidence that firms that exhibit earnings
management also use graphical impression management. They find that managers manage earnings
downwards on the year of the CEO change and upward after the CEO change. After the CEO change,
they find evidence of strong association between earnings management and selectivity of graphs to
support opportunism explanations. Whilst, Aerts and Cheng (2010) find significant association between
earnings management and attribution bias in the Management Discussion and Analysis section of IPOs
prospectus. Companies use both strategies (impression and earnings management) to attract and
persuade IPO subscribers. In particular, they find a strong association between earnings management
and assertive narrative impression management.
Given the high discretion allowed to managers and the absence of scrutiny in relation to the
disclosures in press releases, we expect that managers will engage in both impression and earnings
management to create a positive and credible image of the corporate performance. The hypothesis if
formally posed as follows.
H2: Companies which engage in earnings management are also likely to engage in impression
management in ARPRs
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Although most of the incentives and motivation to engage in earnings management and
impression management are coincident, some might be different. Earnings management and impression
management may represent distinct behavioural processes, driven by different factors or rationales but
they could complement each other. They may be also directed at different audiences. Considering
different levels of user’s sophistication, a similar result could be achieved by manipulating the numbers
(this is likely to be addressed to more sophisticated users) or manipulating the presentation of that
number (this is likely to be addressed to less sophisticated users). A particular subtle type of earnings
management relates to the presentation of financial numbers, based on cognitive reference points.
Psychological studies have shown that reference points influence humans´ perceptions (Rosch, 1975).
Research has investigated this issue in financial reporting (Niskanen and Keloharju, 2000; van
Caneghem, 2002). This strand of research found that because cognitive references greatly affect
human’s cognitive process, using relatively small adjustment, earnings can be significantly enhanced in
the mind of the users of financial reports. For example, humans may perceive a profit of, say, 301
million as abnormally larger than a profit of 299 million (Niskanen and Keloharju, 2000; van
Caneghem, 2002). This could be achieved by minor massaging of figures (earnings management) but
also by rounding-up reported earnings (impression management).
Prior literature shows that target beating behavior is motivated by capital markets and
sophisticated users of financial information (Skinner and Sloan, 2002). For example, missing analysts
forecasts, even by small amounts, may derive into important stock price declines (Skinner and Sloan,
2002). However, as we argue above impression management in ARPRs is more likely to be aimed at
managing the impressions of unsophisticated users of financial information.
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Considering the probability of different target audiences for the press releases, we expect to see a
negative association between impression management and the type of earnings management which
targets more sophisticated users of financial information. In particular, we hypothesize that,
H3: Companies which engage in impression management are less likely to engage in small gain
earnings management in ARPRs
We introduce in this paper some aspects of the opportunistic disclosure practices which have not
been analysed in prior literature relating earnings and impression management. Moreover, we use a
more comprehensive measure of impression management by introducing an aggregate score which
summarises and accounts for several practices of impression management.
Our goal is to demonstrate that these two self-presentational management practices complement
each other in creating an idealistic corporate image. Investigating these techniques separately implies
missing certain aspects that provide an overall management strategy that reinforce the theory supporting
that managers consciously engage on self-serving disclosure practices when preparing their corporate
reports.
3. Methods and data
Earnings management and narrative impression management are expected to be two related dimensions
of management opportunistic disclosure behaviour. In particular, we focus on the extent to which
managers manipulate earnings in financial statements, and how this impacts on the issuance and content
of annual result press releases. When managers manipulate earnings in firm financial statements, the
question arises of whether they shy away from emphasizing firm performance in other corporate
communications, such as the annual results press release.
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To assess the relationship between impression management and earnings management, we run
two simple regressions. In the first one we look at the probability that a firm issues a press release,
conditional on the level of earnings management (EarnMng) and a series of control variables. In the
second one, we study the level of impression management in the annual result press release, as a
function also of earnings management and controls:
0 1Pr( 1)it it titARPR EarnMng Controlsβ β δ τ= = + + +∑ (1)
0 1it it titIMSC EarnMng Controlsδ δ δ τ= + + +∑ (2)
where ARPR takes the value of 1 if the firm issues an ARPR, 0 otherwise. EarnMng is one of our
earnings management proxies and IMSC is the impression management score, and t is the time-period
indicator. If impression management and earnings management are complementary forms of
manipulating the perceptions of outsiders, we expect to observe a positive association between earnings
and impression management in equation (2), (i.e., δ1 > 0) and also in model (1) (i.e., β1 > 0), indicating
that firms that manage their earnings engage in greater promotion of those earnings. On the contrary, if
these practices are substitutes, we expect to observe that firms with greater earnings management will be
less likely to issue an ARPR (i.e., β1 < 0), and if they issue these releases, they will reduce the level of
impression management (i.e., δ1 < 0).
In model (1), we include a series of control variables to account for innate earnings determinants
that may drive a certain level of earnings management and also affect the level of disclosure. Firm size
is associated with the extent of disclosure because large firms can afford the information production
costs and also because they face lower costs of competitive disadvantage (Lang and Lundholm, 1993).
Growth, change in profitability, leverage and capital intensity may influence the disclosure content of
management reports (Aerts, 2001; Aerts and Cheng, 2010; Clatworthy and Jones, 2003). Audit fee is a
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measure of accounting quality (Hribar et al., 2010). Accordingly, the control variables included in this
paper are the following: a) Firm losses (Loss), b) Leverage, c) Market-to-book (MTB), d) Tangibility, e)
Cash flows from operations (CFO), f) a measure of firm size (Size), g) whether the firm issues debt
(Issue Debt) during the period, h) or capital (Issue Capital). Finally we also control for the level of audit
quality (Audit Fee). We also incorporate some of these proxies in model (2), when we estimate the level
of impression management in annual results press releases conditional on the level of earnings
management in the financial statements.
Loss is an indicator variable that takes the value of 1 if the firm reports a current period loss, 0
otherwise. Size is the natural logarithm of total assets. Tangibility is property plant and equipment
scaled by beginning-of-period total assets. Issue Debt (Issue Capital) is an indicator variable that takes
the value of 1 if the firm total debt (shareholders’ equity) increased by more than 10% in the current
period, 0 otherwise. CFO is cash flow from operations deflated by beginning of period total assets. MTB
is the market-to-book ratio. Leverage is total debt scaled by market value. Audit fee is the natural
logarithm of the audit fee paid.
3.1. Measuring earnings management
Following prior literature providing evidence that firms use multiple strategies to manipulate earnings
(Cohen and Zarowin, 2010; Zang, 2006), we use measures of accruals-based and real earnings
management. In particular, we use (i) the absolute value of working capital discretionary accruals
(DAccr), (ii) a proxy of small loss avoidance (SGain), and, to measure real earnings management we use
(iii) the proxy in Roychowdhury (2006) of discretionary cash flow from operations (DCfo). In this
section, we explain the calculation of each of these proxies.
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First, we calculate discretionary working capital accruals using the modified Jones (1991) model
(Dechow et al., 1995). To obtain a measure of abnormal working capital accruals for all firms in
industry j for year t, we estimate the modified Jones model cross-sectionally for all industry-year
combinations with at least 6 observations of data, as follows:
0 11 1 1
1t tt
t t t
WCA REV
TA TA TAα α ε
− − −
∆= + +
(3)
where, WCA is working capital accruals, ∆REV is change in sales, ∆CFO is change in cash flow from
operations and TA are total assets, and t is the time-period indicator. Next, for each firm, we calculate
abnormal working capital accruals (AWCA) as follows:
0 11 1 1
1ˆ ˆt t t
tt t t
WCA REV RECAWCA
TA TA TAα α
− − −
∆ − ∆= − +
(4)
where, 0α̂ and 1α̂ are the fitted industry-coefficients from equation (3). To run models (1) and (2) all
available observations are used to avoid introducing biases in the analysis.
To analyse the existence of real activities manipulation we focus on one specific type of real
earnings management: sales manipulation, which we measure following the method of Roychowdhury
(2006). Similar to the calculation of abnormal accruals in equations (3) and (4), the first stage consists of
deriving normal cash flow activity. We run the following cross-sectional regression for every industry-
year combination with at least 6 observations of data:
0 1 21 1 1 1
1t t tt
t t t t
CFO REV REVe
TA TA TA TAβ β β
− − − −
∆= + + +
(5)
where all variables are defined as before. For every observation, abnormal cash flow (Abnormal CFO) is
obtained by subtracting from actual firm CFO the normal CFO calculated using the estimated β̂
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coefficients from equation (5) and multiplying it by minus 1, so that abnormal cash flows are increasing
in the amount of sales manipulation. If firms manipulate sales upwards by offering more lenient credit
terms, then it is expected that the level of cash flow will be abnormally low, given the level of sales.
Thus, firms that manipulate their sales have abnormally low levels of CFO, given the reported sales.
Finally, we consider a measure of earnings management that may be driven both by accrual and
cash flow manipulation: small loss avoidance. Extant literature demonstrates that managers try to avoid
reporting small losses and use accounting discretion to push earnings into becoming small gains (e.g.,
Burgstahler and Dichev, 1997). We create a dummy variable (SGain) that takes the value of 1 if the firm
reports a small gain (defined as positive earnings deflated by lagged total assets that are smaller or equal
to 0.05), 0 otherwise.
3.2. Measuring impression management
We use manual content analysis which has been widely used and defended over computer-aid content
analysis in prior literature (Beattie et al., 2004; Clatworthy and Jones, 2003; Schleicher and Walker,
2010). We advocate on a list of positive and negative keywords developed in prior literature and used
extensively in academic research (Abrahamson and Park, 1994; Brennan et al., 2009; Clatworthy and
Jones, 2003; Matsumoto et al., 2006).4 Two coders then scrutinise each press release5 for (1) positive
and negative keywords, (2) positive and negative amounts, (3)-(4) location of keywords and amounts
4 Critical to the content analysis is the list of words deemed to be positive or negative. The list of keywords used in this paper is an adapted version of that used in prior literature (references). New keywords are added as the content analysis evolved making this a customized list that fits characteristics and particular issues discussed in press releases better. Most studies use general wordlists (GI or Diction) rather than wordlists that are specific to the domain of financial disclosure. General wordlists likely omit words that would be considered positive or negative in the context of financial disclosure and include words that would not (for further discussion in this issue see, Henry and Leone, 2009).The list used in this study is available from the authors upon request. 5 The entire press release and not only a section of it is analysed for the purpose of this research.
20
(most, next most or least emphasised section) (5)-(6) repetition of statements and repetition of amounts,
(7) reinforcement of keywords, (8) reinforcement of figures (performance comparisons), (9) selection of
profit figures from the profit and loss account or not. Profit figures included on the profit and loss
account are ranked to assess the degree of selectivity (high, medium or low).
Given the subjectivity of the manual coding of qualitative information (keywords and statements
which coding might be subjective), the coding process needs to be validated. We follow previous
literature and test-check the coding process using a sub-sample of press releases. Following prior
literature (Brennan et al., 2009; Clatworthy and Jones, 2003), a subsample of these press releases are
coded by two coders independently following the same rules to code the disclosure practices analysed in
this study (Breton and Taffler, 2001; Clatworthy and Jones, 2003; Krippendorff, 1980). Similar to prior
literature, the agreement rate obtained after the coding process by the two coders is greater than 90%
(Clatworthy and Jones, 2003).
We measure impression management for qualitative and quantitative information separately6. An
aggregated score is the main measure of impression management. These scores are calculated following
the methodology in Brennan et al. (2009) also similar to that used by Gordon et al. (2008), Tetlock et al.
(2007) and Tetlock et al. (2008). The score aggregates four potentially misleading disclosure techniques
including thematic manipulation, emphasis, performance comparisons and selectivity. The qualitative
impression management score comprises the coding of (1) keywords and statements, (2) repetition of
statements, (3) reinforcement of keywords and (4) location of information within the press release. The
quantitative impression management score comprises the coding of (1) amounts, (2) repetition of
6 We keep the two types of information separately because, as shown in prior literature, qualitative and quantitative information may serve different reporting strategies (e.g., Skinner, 1994)
21
amounts, (3) performance comparisons, (4) location of information within the press release and (5)
selectivity of the amount included in the press release from the profit and loss account or not.
For qualitative information (thematic), each keyword is given a ±1 point (or weight) depending
on whether it was classified as positive (+1) or negative (-1). When there is reinforcement (emphasis) an
additional ±0.5 point is awarded depending on whether it is a positive or a negative reinforcement.
Similarly, for quantitative information (thematic), each amount is given a ±1 point depending on
whether the amount is positive or negative. No points are awarded to neutral amounts (neutral amount
cannot be classified as positive or negative with the information included in the press release). If a
performance comparison is present (emphasis), a ±0.5 point is computed for positive or negative
comparisons (related to prior year performance). Where the figure has been selected from the profit and
loss account it will get 1 additional point if it shows a high degree of selectivity and 0.5 point if it shows
a medium degree of selectivity. The method to calculate the scores is summarised in Appendix 1.
As explained in Brennan et al. (2009), the weightings used in developing composite scores are
arbitrary and although valuable, disclosure indices inevitably involve subjective judgement (Marston
and Shrives, 1991). As suggested by previous research (Beattie et al., 2004), we vary the weightings to
test for changes in results derived from these variations. Following prior literature (Brennan et al., 2009;
Gordon et al., 2008; Tetlock et al., 2008), the main score is calculated as follows.
IM Score1 = Score IM N Score IM P
Score IM N - Score IM P
+, (6)
where PIM Score is the total positive impression management score for a press release and NIM
Score is the total negative impression management score for a press release. In our sensitivity tests, we
also use a formula that accounts for the length of the press release (Matsumoto et al., 2006).
22
3.3. Data and sample selection procedure
The entire population of Spanish companies listed on the Madrid Stock Exchange in 2005 and
2006 are considered for this study. Only foreign companies and investment societies are excluded. This
results in a sample of 253 firm-year observations.7 The Spanish market provides us with a setting where
a large variety of cross-sectional differences among companies converge in a relatively small population
which is more suitable for the type of content analysis carried out in this study8. Within this setting we
do not need to exclude companies from the sample using procedures that will bias the final sample or
restrict the sample to specific industry or group of industries.
The press releases are gathered primarily from the companies’ Websites, the Spanish Stock
Exchange Commission (CNMV) or direct request from the company. This process ensures that all
company press releases issued were collected. Accounting and market data necessary to calculate the
variable is extracted from Company Analysis Extel Financials database, which provides as reported data.
Table 1 Panel A presents the sample. Overall, 42% of companies does not issue an annual results press
releases (45% in 2005 and 39% in 2006). The sample consists of 148 press releases for which we can
estimate impression management scores.
4. Results
Table 1 Panel B presents descriptive evidence. As expected, the values of DAccr and DCfo are on
average close to zero, as they are the residuals obtained from models (3) and (5) above. The impression
management scores (IMSC1, IMSC2 and IMSC3) take values between -1 and 1, with the average firm
7 The large number of investment companies registered on the Madrid Stock Exchange are excluded due to their specific legal accounting framework and the nature of their activities. 8 Manual content analysis is labour intensive and it is not suitable for large samples size.
23
having a score of between 0 and 1. The descriptive evidence reveals the presence of some outliers,
particularly with respects to MTB (minimum value of -16.54), however, due to the relatively small
sample size, we keep these observations in the model; the results are not sensitive to the exclusion of
these firm-year observations.
Table 2 presents the correlation coefficients between the main variables of interest: the IM
scores, the EarnMng proxies and ARPR. The evidence presented in this table reveals a positive
association between the measures of earnings management and impression management. In particular,
the correlation coefficient between IMSC1 and the EarnMng proxies is positive for DAcrr (coeff. =
0.132, p-val = 0.10), and DCfo (coeff. = 0.159, p-val = 0.04), and negative and not significant in the
case of SGain (coeff. = -0.011, p-val = 0.87). The same is true for the other IM Scores, where the results
are similar. This provides early evidence of a positive association between earnings management and
impression management. Table 2 also reveals that the impression management scores are very highly
correlated amongst each other, with correlations over 0.600 in all cases. Generally APR is negatively
correlated with the earnings management proxies, although the correlation is only weakly significant
using a one-tail test in the case of DAccr (coeff. = -0.099, p-val = 0.16).
Table 3 Panels A and B presents the results from the univariate tests comparing the average
levels of earnings management between firms classified as High vs. Low impression management. To
split firms, we classify as High (Low) IM those firms that have an impression management score above
(equal or below) the annual median value. Panel A presents results for IMSC1 and Panel B for IMSC2
and IMSC3 (the classification is identical in this case). The results from this test again suggest that there
is a positive association between impression management and earnings management. Firms with greater
levels of impression management in their ARPRs have greater levels of discretionary accruals (DAccr)
and cash flow from operations (DCfo). However, they are not more likely to report Small Gains. This
24
could indicate that the joint occurrence of earnings and impression management hinges on the user to
which the ARPR is aimed at, which likely also drives the type of earnings management. As shown in
prior literature, target beating behavior is motivated by capital markets and sophisticated users of
financial information, such as analysts (Skinner and Sloan, 2002). Impression management in ARPRs is
unlikely to be aimed at those users, but rather, at altering the impressions of less sophisticated financial
information users, which may rely on the information contained in ARPRs to make financial decisions.
As was previously argued, it is also likely that managers plan firm corporate communication as a
single strategic decision. It is unlikely that they separately devise strategies for each separate piece of
corporate communication, and thus, it is likely that their management style permeates different types of
corporate communication. In our main tests, we run two sets of analyses. First, we model the probability
that the firm prepares an ARPR, and second, we look at the level of impression management in those
press releases.
Table 4 Panels A to C presents the results of model (1). Overall we obtain some weak evidence
of a negative association between the decision to issue an ARPR and the level of earnings management,
consistent with the descriptive evidence in Table 2. Specifically, in Panel A we find that the likelihood
that a firm issues an ARPR is negatively associated to the level of discretionary accruals (DAccr = -
2.064, p-value = 0.03). We also find evidence of a negative association between discretionary cash flows
and the likelihood of issuing an ARPR on Panel C. However, it is not significant at conventional levels.
This may indicate that a certain subset of managers that manipulate earnings shy away from promoting
those earnings too much, reducing voluntary disclosures and explanations on those earnings. Overall, the
results are consistent with the hypothesized relationship (H1).
Table 5 Panels A to C reports evidence on the relationship between earning management and
impression management for different measures of earning management. The evidence presented in Panel
25
A, regarding DAccr suggests a positive association between earnings management and impression
management. In particular, the coefficient on DAccr is positive across all specifications and significant
for the IMSC2 and IMSC3 specifications. Similarly, the evidence from Panels B strongly suggests that
there is a positive relationship between impression management and earnings management (H2). In
particular, in Panel B, DCfo is also positive and significant across all model specifications (IMSC1,
DCfo = 0.430, p-value = 0.02; IMSC2, DCfo = 0.567, p-value = 0.04; IMSC3, DCfo = 0.555, p-value =
0.04). The evidence in Panel C confirms the previously reported descriptive evidence of no clear
association between impression management and target beating behavior. In fact, the coefficient is
negative and significant across all model specifications. This is hypothesized in H3. The evidence
reported in this table suggests that different types of earnings management may be destined to alter
different types of contracts, or influence different types of users of financial information, and that the
combination of impression and earnings management techniques also hinges on who the destined users
are.
Overall this evidence also seems to suggest that there may be different managerial styles in
place, and that although the evidence indicates that impression management and earnings management
are complementary strategies for a significant part of the sample analyzed, there may also exist a subset
of managers that prefer not to go for overkill in their self-serving behavior, reducing exposure to the
press and the public by limiting other types of disclosures. Also, the evidence may be interpreted as
different types of earnings management (accruals-based vs. real earnings management) being associated
to differing communication strategies or to differing monitoring.
26
4.1. Robustness checks
Following some empirical evidence observed in prior literature we investigate a more aggressive form of
impression management. Guillamon-Saorin et al. (2009) in a study investigating impression
management in press releases headlines detect that companies which include higher level of self-serving
disclosure practices in their press releases headlines are those who are more likely to be managing their
earnings (reporting very small gains). As a robustness checks, we follow the work of Guillamon-Saorin
et al. (2009) and repeat the analyses reported in Table 5 but focusing on impression management in the
headline of the press release. The headline is the most prominent area of the press release. We construct
quantitative and qualitative scores following the explained method focusing on the headline of the
ARPR. The impression management scores take values between 0 and 5, with the average firm having a
score of between 1 and 2. Using these new scores, we repeat the analyses reported on Table 5.
Table 6 Panels A to C report the results from this test. The evidence presented in Panel A,
regarding DAccr is inconclusive. However, the evidence from Panels B and C strongly suggests that
there is a positive relationship between aggressive impression management and earnings management.
In particular, in Panel B, DCfo is also positive and significant across all model specifications (IMSC1,
DCfo = 3.776, p-value = 0.02; IMSC2, DCfo = 3.675, p-value = 0.02; IMSC3, DCfo = 3.705, p-value =
0.01). Also, in Panel C, SGain is positive and significant across all model specifications (IMSC1, SGain
= 0.423, p-value = 0.03; IMSC2, SGain = 0.353, p-value = 0.05; IMSC3, SGain = 0.354, p-value =
0.03). Interestingly, we find that those proxies of earnings management that are associated to real
earnings management (DCfo and SGain) are positively associated to impression management in ARPRs,
and also, to more aggressive types of impression management.
27
5. Conclusions
Financial reporting communication involves a number of corporate disclosures, both mandatory and
voluntary. In this paper, we take a more comprehensive approach than prior research to evaluating firm
financial reporting communication strategy and examine the relationship between earnings management
in the financial statements and a number of impression management techniques in annual results press
releases. We are interested in assessing the relationship between these two corporate self-serving
reporting practices.
Using a sample of Spanish quoted companies for the period 2005-2006 we first show that firms
with greater earnings management (based on discretionary accruals) are less likely to issue an annual
result press release. This is consistent with firms that manipulate earnings trying to avoid greater
scrutiny by publicly promoting manipulated earnings numbers, potentially, to avoid litigation and
political costs. Amongst those that finally issue an annual result press release, we find evidence that
firms with greater earnings management also show greater impression management, indicating that
managers that engage in self-serving disclosure practices may do so at several levels of firm
communication (Aerts and Cheng, 2010).
Overall, the evidence seems to suggests that there may be different managerial styles in place
regarding corporate communications, and that although the evidence indicates that impression
management and earnings management are complementary strategies for a significant part of the sample
analyzed, there may also exist a subset of managers that prefer not to go for overkill in their self-serving
behavior, reducing exposure to the press and the public by limiting other types of disclosures. Also, the
evidence may be interpreted as different types of earnings management (accruals-based vs. real earnings
management) being associated to differing communication strategies or to differing monitoring. This is
consistent with prior literature which provides evidence of the use of multiple earnings management
28
practices (Cohen and Zarowin, 2010; Zang, 2006). In particular, the evidence provided in this paper is in
line with prior literature (Graham et al., 2005) suggesting that managers may prefer real earnings
management activities compared to accrual-based earnings management, as real earnings management
seems to be associated to more aggressive forms of impression management. This is because earnings
management based in real activities are less likely to be detected by auditors and regulators (Lo, 2008;
Roychowdhury, 2006).
This paper shows that companies appear to manipulate their reported earnings as well as the
presentation of both qualitative and quantitative information by quite overt means. The degree to which
users are successful in identifying earnings and impression management at this level is beyond the scope
of the paper and further research is required. Moreover, the investigation of the effectiveness of
monitoring devices, such as corporate governance, to mitigate the use of impression and earnings
management would be interesting. One issue that is attracting research attention recently is the effect of
related party transactions on the way earnings management is pursued. For group firms is relatively low
costly to engage in cash-based related transactions. For example, using related cash sales to their
controlling owners to boost earnings (Jian and Wong, 2010). In the Spanish case, where the monitoring
role of auditors is weak given the country’s weak legal environment and the poor quality of enforcement
(Gonzalo, 1995; Iribar, 2002; Ruiz Barbadillo et al., 2004), it is likely that listed companies will
consider using cash-based related sales to manage earnings. However, this remains an empirical issue
which deserves further analysis.
29
Appendix 1: Method used to calculate the composite scores (IMSC)
Adapted from Brennan et al. (2009). Definition of these measures is as follows: Positive/negative keyword: (1) a sentence in which the word is mentioned communicates a negative/positive financial outcome for the company and (2) the sentence mentions the environment affecting the company positively/ negatively. Positive/negative amount: Amounts are categorised into positive or negative by reference to prior year results. Reinforcement: A keyword is reinforced when a qualifier is included to emphasise its positive or negative meaning. Performance comparison: When the current year amount is accompanied by a benchmark / prior year amount showing increase/decrease in the current year amount. Selectivity: whether the amount appears on the face of the profit and loss account or not. Selectivity degree: Choice/selection of performance number, from the highest to lowest amounts on the face of the profit and loss account based on monetary value to be included in the press release.
Qualitative score
IMSC1 Weighting
(1) Thematic� Keywords 1.0 (2)(a) Emphasis� Location: Most-, next-most, least-emphasised 1.0/0.5/0.0 (2)(b) Emphasis� Repetition (statements only) 0.5 (2)(c) Emphasis� Reinforcement (Keywords only) 0.5 Quantitative score
IMSC2 Selectivity applies
Weighting
IMSC3 No selectivity
Weighting (1) Thematic� Disclosure of quantitative performance monetary and
non-monetary amounts 1.0 1.0
(2)(a) Emphasis� Location: Most-, next-most, least-emphasised 1.0/0.5/0.0 1.0/0.5/0.0 (2)(b) Emphasis� Repetition 0.5 0.5 (3) Emphasis� Performance comparisons 0.5 0.5 (4) Selectivity Highest/medium/lowest category of amounts from
which selection can be made 1.0/0.5/0.0
30
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Table 1. Descriptive statistics and sample composition
APR takes the value of 1 if the firm releases an annual results press release, 0 otherwise. DAccr is the absolute value of discretionary accruals as calculated using the modified Jones model. DCfo is absolute value of discretionary cash flows as calculated by the Roychowdhury (2006) model. SGain is an indicator variable that takes the value of 1 if the firm reports a current period small gain (defined as net income deflated by lagged total assets between 0 and 0.05); 0 otherwise. IMSC1 to IMSC3 are the impression management scores defined in the Appendix. Loss is an indicator variable that takes the value of 1 if the firm reports a current period loss, 0 otherwise. Size is the natural logarithm of total assets. Tangibility is property plant and equipment scaled by beginning-of-period total assets. Issue Debt (Issue Capital) is an indicator variable that takes the value of 1 if the firm total debt (shareholders’ equity) increased by more than 10% in the current period, 0 otherwise. CFO is cash flow from operations deflated by beginning of period total assets. MTB is the market-to-book ratio. Leverage is total debt scaled by market value. Audit fee is the natural logarithm of the audit fee paid.
Panel A: Sample selection procedure
Year Companies Issuers of ARPRs Non-issuers of ARPRs
No. No. (%) No. (%) 2005 126 70 (55) 56 (45) 2006 127 78 (61) 49 (39) Total 253 148 (58) 105 (42)
Panel B: Descriptive statistics
Lower Upper Variable Mean Minimum Quartile Median Std Dev Quartile Maximum APR 0.58 0.00 0.00 1.00 0.50 1.00 1.00 DAccr 0.14 0.00 0.03 0.07 0.19 0.18 1.84 DCfo 0.07 0.00 0.02 0.05 0.07 0.09 0.49 SGain 0.27 0.00 0.00 0.00 0.50 1.00 1.00 IMSC1 0.93 -0.08 0.94 1.00 0.16 1.00 1.00 IMSC2 0.92 -1.00 1.00 1.00 0.24 1.00 1.00 IMSC3 0.92 -1.00 1.00 1.00 0.24 1.00 1.00 Control variables Loss 0.09 0.00 0.00 0.00 0.29 0.00 1.00 Size 14.07 8.42 12.49 13.84 2.14 15.39 20.54 Tangibility 0.48 0.00 0.09 0.32 1.42 0.60 23.28 Issue Debt 0.47 0.00 0.00 0.00 0.50 1.00 1.00 Issue Capital 0.53 0.00 0.00 1.00 0.50 1.00 1.00 CFO 0.06 -1.48 0.00 0.07 0.21 0.14 0.89 MTB 3.48 -16.54 1.54 2.48 4.89 3.79 45.46 Leverage 0.28 0.00 0.09 0.29 0.20 0.40 0.88 Audit Fee 6.01 0.96 4.87 5.98 1.88 6.93 12.96
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Table 2. Correlation matrix
APR takes the value of 1 if the firm releases an annual results press release, 0 otherwise. DAccr is the absolute value of discretionary accruals as calculated using the modified Jones model. DCfo is absolute value of discretionary cash flows as calculated by the Roychowdhury (2006) model. SGain is an indicator variable that takes the value of 1 if the firm reports a current period small gain (defined as net income deflated by lagged total assets between 0 and 0.05); 0 otherwise. IMSC1 to IMSC3 are the impression management scores defined in the Appendix.
APR DAccr DCfo SGain IMSC1 IMSC2 DAccr -0.099 0.16 DCfo -0.067 0.209 0.34 0.00 SGain 0.009 0.013 -0.159 0.88 0.85 0.02 IMSC1 . 0.132 0.159 -0.011 . 0.10 0.04 0.87 IMSC2 . 0.113 0.123 -0.068 0.642 . 0.15 0.12 0.32 <0.01 IMSC3 . 0.111 0.122 -0.067 0.640 0.998 . 0.16 0.12 0.34 <0.01 <0.01
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Table 3. Univariate tests
APR takes the value of 1 if the firm releases an annual results press release, 0 otherwise. DAccr is the absolute value of discretionary accruals as calculated using the modified Jones model. DCfo is absolute value of discretionary cash flows as calculated by the Roychowdhury (2006) model. SGain is an indicator variable that takes the value of 1 if the firm reports a current period small gain (defined as net income deflated by lagged total assets between 0 and 0.05); 0 otherwise. IMSC1 to IMSC3 are the impression management scores defined in the Appendix.
Panel A: IMSC1
Low IM High IM Mean diff Median Mean Median Mean Median p-value t-test p-value z-score DAccr 0.117 0.052 0.129 0.073 0.012 0.021 0.47 0.04 DCfo 0.049 0.041 0.072 0.044 0.023 0.003 0.03 0.11 SGain 0.564 1.000 0.433 0.000 -0.131 -1.000 0.06 0.06
Panel B: IMSC2 and IMSC3
Low IM High IM Mean diff Median Mean Median Mean Median p-value t-test p-value z-score DAccr 0.126 0.054 0.122 0.063 -0.004 0.009 0.46 0.08 DCfo 0.054 0.041 0.065 0.045 0.011 0.004 0.21 0.13 SGain 0.471 1.000 0.448 0.000 -0.023 -1.000 0.08 0.08
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Table 4. Earnings management and the ARPR release decision
We model the probability that the firm releases an ARPR. APR takes the value of 1 if the firm releases an annual results press release, 0 otherwise. DAccr is the absolute value of discretionary accruals as calculated using the modified Jones model. DCfo is absolute value of discretionary cash flows as calculated by the Roychowdhury (2006) model. SGain is an indicator variable that takes the value of 1 if the firm reports a current period small gain (defined as net income deflated by lagged total assets between 0 and 0.05); 0 otherwise. IMSC1 to IMSC3 are the impression management scores defined in the Appendix. Loss is an indicator variable that takes the value of 1 if the firm reports a current period loss, 0 otherwise. Size is the natural logarithm of total assets. Tangibility is property plant and equipment scaled by beginning-of-period total assets. Issue Debt (Issue Capital) is an indicator variable that takes the value of 1 if the firm total debt (shareholders’ equity) increased by more than 10% in the current period, 0 otherwise. CFO is cash flow from operations deflated by beginning of period total assets. MTB is the market-to-book ratio. Leverage is total debt scaled by market value. Audit fee is the natural logarithm of the audit fee paid.
Panel A: Logistic regression of APR on DAccr and controls
Standard Wald Parameter Estimate Error Chi-Square Pr > ChiSq Intercept -1.329 2.894 2.108 <0.01 DAccr -2.064 1.116 3.423 0.032 Loss -0.732 0.893 0.673 0.412 Size 1.159 0.255 2.066 <0.01 Tangibility -1.698 0.940 3.262 0.035 Issue Debt 0.468 0.494 0.896 0.344 Issue Capital 0.291 0.458 0.405 0.525 CFO 0.698 1.486 0.221 0.639 MTB -0.081 0.047 2.913 0.044 Leverage 1.235 1.047 1.391 0.238 Audit Fee -0.128 0.143 0.802 0.370 Likelihood ratio 75.3 <0.01 Concordant percent 87.6
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Table 4. Earnings management and the ARPR release decision (Continued)
Panel B: Logistic regression of APR on SGain and controls
Standard Wald Parameter Estimate Error Chi-Square Pr > ChiSq Intercept -8.827 1.819 23.564 <0.01 SGain 0.097 0.406 0.057 0.410 Loss -0.423 0.828 0.261 0.610 Size 0.693 0.158 19.215 <0.01 Tangibility 0.124 0.251 0.243 0.622 Issue Debt 0.385 0.384 1.006 0.316 Issue Capital 0.110 0.396 0.077 0.782 CFO 1.618 1.162 1.937 0.164 MTB -0.042 0.035 1.454 0.228 Leverage -0.002 0.457 0.000 0.997 Audit Fee -0.033 0.117 0.080 0.777 Likelihood ratio 61.8 <0.01 Concordant percent 81.7
Panel C: Logistic regression of APR on DCfo and controls
Standard Wald Parameter Estimate Error Chi-Square Pr > ChiSq Intercept -13.114 2.825 21.545 <0.01 DCfo -1.099 3.158 0.121 0.73 Loss -0.469 0.856 0.300 0.58 Size 1.123 0.246 20.765 <0.01 Tangibility -1.450 0.910 2.535 0.11 Issue Debt 0.436 0.491 0.789 0.37 Issue Capital 0.329 0.461 0.508 0.48 CFO 1.119 1.586 0.498 0.48 MTB -0.081 0.048 2.768 0.10 Leverage 0.938 1.030 0.829 0.36 Audit Fee -0.126 0.143 0.771 0.38 Likelihood ratio 72 <0.01 Concordant percent 86.9
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Table 5. Relationship between earnings management and impression management
DAccr is the absolute value of discretionary accruals as calculated using the modified Jones model. DCfo is absolute value of discretionary cash flows as calculated by the Roychowdhury (2006) model. SGain is an indicator variable that takes the value of 1 if the firm reports a current period small gain (defined as net income deflated by lagged total assets between 0 and 0.05); 0 otherwise. IMSC1 to IMSC3 are the impression management scores defined in the Appendix. Loss is an indicator variable that takes the value of 1 if the firm reports a current period loss, 0 otherwise. Size is the natural logarithm of total assets. CFO is cash flow from operations deflated by beginning of period total assets. MTB is the market-to-book ratio. Leverage is total debt scaled by market value.
Panel A: IMSC and DAccr
IMSC1 IMSC2 IMSC3
Parameter Parameter Parameter Variable Estimate Pr > |t| Estimate Pr > |t| Estimate Pr > |t| Intercept 0.889 <0.01 0.982 <0.01 0.991 <0.01 DAccr 0.091 0.12 0.153 0.08 0.151 0.09 Loss -0.006 0.47 0.081 0.47 0.085 0.22 Size -0.003 0.37 -0.014 0.16 -0.014 0.16 CFO -0.018 0.43 0.159 0.18 0.157 0.18 MTB 0.004 0.19 0.001 0.45 0.001 0.49 Leverage 0.042 0.08 0.071 0.06 0.071 0.06 N 145 145 145 R-Sq. 0.04 0.04 0.04
Panel B: IMSC and DCfo
IMSC1 IMSC2 IMSC3
Parameter Parameter Parameter Variable Estimate Pr > |t| Estimate Pr > |t| Estimate Pr > |t| Intercept 0.882 <0.01 0.980 <0.01 0.988 <0.01 DCfo 0.430 0.02 0.567 0.04 0.555 0.04 Loss -0.031 0.35 0.044 0.33 0.049 0.33 Size -0.005 0.31 -0.015 0.18 -0.016 0.13 CFO 0.013 0.49 0.187 0.14 0.184 0.14 MTB 0.003 0.17 -0.001 0.49 -0.001 0.49 Leverage 0.045 0.06 0.076 0.05 0.075 0.04 N 145 145 145 R-Sq. 0.06 0.05 0.05
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Table 5. Relationship between earnings management and impression management (Continued)
Panel C: IMSC and SGain
IMSC1 IMSC2 IMSC3
Parameter Parameter Parameter Variable Estimate Pr > |t| Estimate Pr > |t| Estimate Pr > |t| Intercept 0.682 <0.01 0.664 0.01 0.677 <0.01 SGain -0.042 0.08 -0.098 0.01 -0.096 0.01 Loss -0.121 0.12 0.036 0.39 0.052 0.34 Size 0.017 0.02 0.014 0.11 0.013 0.11 CFO -0.097 0.15 0.029 0.40 0.030 0.41 MTB 0.005 0.16 -0.006 0.18 -0.007 0.16 Leverage 0.027 0.11 0.038 0.09 0.037 0.09 N 145 145 145 R-Sq. 0.09 0.11 0.10
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Table 6. Relationship between earnings management and impression management in ARPR headlines
DAccr is the absolute value of discretionary accruals as calculated using the modified Jones model. DCfo is absolute value of discretionary cash flows as calculated by the Roychowdhury (2006) model. SGain is an indicator variable that takes the value of 1 if the firm reports a current period small gain (defined as net income deflated by lagged total assets between 0 and 0.05); 0 otherwise. IMSC1 to IMSC3 are the impression management scores defined in the Appendix. Loss is an indicator variable that takes the value of 1 if the firm reports a current period loss, 0 otherwise. Size is the natural logarithm of total assets. CFO is cash flow from operations deflated by beginning of period total assets. MTB is the market-to-book ratio. Leverage is total debt scaled by market value.
Panel A: IMSC and DAccr
IMSC1 IMSC2 IMSC3
Parameter Parameter Parameter Variable Estimate Pr > |t| Estimate Pr > |t| Estimate Pr > |t| Intercept 1.314 0.11 1.460 0.09 1.265 0.10 DAccr -0.006 0.50 -0.010 0.49 -0.007 0.49 Loss -0.511 0.25 -0.530 0.24 -0.147 0.42 Size 0.018 0.41 0.013 0.43 0.005 0.47 CFO -1.342 0.10 -1.326 0.10 -0.597 0.27 MTB 0.057 0.08 0.047 0.12 0.030 0.21 Leverage -0.250 0.13 -0.177 0.21 -0.173 0.20 N 145 145 145 R-Sq. 0.04 0.03 0.01
Panel B: IMSC and DCfo
IMSC1 IMSC2 IMSC3
Parameter Parameter Parameter Variable Estimate Pr > |t| Estimate Pr > |t| Estimate Pr > |t| Intercept 0.962 0.18 1.117 0.14 0.920 0.17 DCfo 3.776 0.02 3.675 0.02 3.705 0.01 Loss -0.521 0.24 -0.540 0.23 -0.157 0.41 Size 0.029 0.35 0.024 0.37 0.016 0.41 CFO -1.491 0.07 -1.469 0.07 -0.743 0.22 MTB 0.052 0.09 0.042 0.14 0.025 0.24 Leverage -0.252 0.12 -0.180 0.20 -0.175 0.19 N 145 145 145 R-Sq. 0.09 0.07 0.07
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Table 6. Relationship between earnings management and impression management in ARPR headlines (Continued)
Panel C: IMSC and SGain
IMSC1 IMSC2 IMSC3
Parameter Parameter Parameter Variable Estimate Pr > |t| Estimate Pr > |t| Estimate Pr > |t| Intercept 0.622 0.24 0.766 0.19 0.318 0.35 SGain 0.423 0.03 0.353 0.05 0.354 0.04 Loss -0.234 0.38 -0.290 0.35 0.125 0.43 Size 0.052 0.19 0.054 0.18 0.063 0.13 CFO -0.969 0.08 -1.353 0.02 -0.685 0.14 MTB 0.046 0.11 0.036 0.17 0.019 0.29 Leverage -0.151 0.17 -0.101 0.26 -0.075 0.30 N 145 145 145 R-Sq. 0.06 0.06 0.04