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An International Meeting of American Accounting
Association
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Operational Flexibility and Earnings Management: Some Evidence of the Benefits of Breadth and the Costs of Depth in Multinational Corporations |
Mark A. Bliss
The Hong Kong Polytechnic University
Ferdinand A. Gul
The Hong Kong Polytechnic University
Abstract: This study examines the association between the structure of MNC overseas operations and earnings management. Using a sample of S & P 1500 firms, the study shows that that high depth firms are significantly associated with higher levels of discretionary accruals and high breadth firms have significantly lower levels of discretionary accruals. Tests show that high depth firms are more likely to manage earnings when (1) the firm reported a loss in the previous financial year, and (2) the firm reported a loss in the previous financial year and also suffered a substantial share price decline. Tests show high breadth firms are associated with less discretionary accruals when the firm sought substantial financing either by increasing the value of shares outstanding by at least ten percent, or by increasing long-term debt by at least twenty percent. It is also found that high breadth firms have higher levels of accruals quality.