Journal of Accounting and Economics 42 (2006) 335–370
Earnings management through real
Sloan School of Management, Massachusetts Institute of Technology, Cambridge, MA 02142, USA
I ﬁnd evidence consistent with managers manipulating real activities to avoid reporting annual
losses. Speciﬁcally, I ﬁnd evidence suggesting price discounts to temporarily increase sales,
overproduction to report lower cost of goods sold, and reduction of discretionary expenditures to
improve reported margins. Cross-sectional analysis reveals that these activities are less prevalent in
the presence of sophisticated investors. Other factors that inﬂuence real activities manipulation
include industry membership, the stock of inventories and receivables, and incentives to meet zero
earnings. There is also some, though less robust, evidence of real activities manipulation to meet
annual analyst forecasts.
r 2006 Elsevier B.V. All rights reserved.
JEL classiﬁcation: M4; M41; M43; M1
Keywords: Capital markets; Accounting choice; Earnings manipulation
ARTICLE IN PRESS
0165-4101/$ - see front matter r 2006 Elsevier B.V. All rights reserved.
This paper is based on my dissertation at the University of Rochester. I am grateful for the guidance I have
received from my thesis advisor, Ross L. Watts and from my thesis committee members, Jerold Zimmerman and
Andrew Leone. This paper has beneﬁted from the comments of the editor, Doug Skinner (the editor), and Joseph
Piotroski (the referee). I have also received helpful comments and suggestions from S.P. Kothari, Joanna Wu,
Charles Wasley, Jim Brickley, Ludger Hentschel, Liz Demers, Shailendra Pandit, Joe Weber, and Hema
Roychowdhury. I am grateful to the workshop participants at University of Michigan, Duke University,
University of Pennsylvania, University of Chicago, University of Michigan, MIT, Harvard University, Columbia
University, Northwestern University, Emory University and Yale University. All errors in the paper are mine.
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