Managers manipulate firm’s earnings through real activities to show good performance in the current period. This article determines whether there is any impact of these earnings manipulation in future financial performance or not. A panel data analysis technique generalized least square (GLS) method was used for analysis. The sample includes 119 firms listed in Karachi Stock Exchange (KSE) for the years 2004–2011. The article provides evidence that firms engaged in real earnings management (REM) activities through sales manipulation to report higher earnings have worse financial performance in future. It reveals that earnings manipulation seems helpful and appealing in current situation but creates problems in future.
AbbasF.TahirM., & Mutee-ur-Rehman. (2012). A comparison of financial performance in the banking sector: Some evidence from Pakistani commercial banks. Journal of Busniness Administration and Education, 1(1), 1–44.
2.
AliA.ZhangW. (2012). CEO tenure and earnings management. Working Paper, Cheung Kong Graduate School of Business.
3.
AltmanE. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. Journal of Finance, 23(4), 189–209.
4.
AnjumN.SaifM. I.MalikQ. A.HassanS. (2012). Earnings management and firms profitability: Evidence from Pakistan. European Journal of Economics, Finance and Administrative Sciences, (47), 13–18.
5.
BarthM. E.ElliottJ. A.FinnM. W. (1999). Market rewards associated with patterns of increasing earnings. Journal of Accounting Research, 37(2), 387–413.
6.
BhojrajS.SenguptaP. (2003). The effect of corporate governance mechanisms on bond ratings and yields: The role of institutional investors and outside directors. The Journal of Business,76(3), 455–475.
7.
ChenJ. Z.CussattM.GunnyK. A. (2013). Can a less independent board be more effective at monitoring?—Evidence from real activities manipulation. Working Paper, University of Colorado at Boulder.
8.
ChenJ. Z.ReesL.SivaramakrishnanK. (2010). On the use of accounting vs. real earnings management to meet earnings expectations– a market analysis. Working Paper, University of Colorado at Boulder.
9.
CohenD.ZarowinP. (2010). Accrual-based and real earnings management activities around seasoned equity offerings. Journal of Accounting and Economics, 50(1), 2–19.
10.
DeAngeloH.DeAngeloL.SkinnerD. J. (1996). Reversal of fortune dividend signaling and the disappearance of sustained earnings growth. Journal of Financial Economics, 40(3), 341–371.
11.
DechowP. M.KothariS. P.WattsR. L. (1998). The relation between earnings and cash flows. Journal of Accounting and Economics, 25(2), 133–168.
12.
EhsanS.KaleemA. (2012). An empirical investigation of the relationship between corporate social responsibility and financial performance (Evidence from manufacturing sector of Pakistan). Journal of Basic and Applied Science. Res, 2(3), 2909–2922.
13.
EldenburgL.GunnyK.HeeK.SoderstromN. (2007). Earnings management through real activities manipulation: Evidence From Nonprofit Hospitals. Working Paper, University of Arizona.
14.
EwertR.WagenhoferA. (2005). Economic effects of tightening accounting standards to restrict earnings management. The Accounting Review, 80(4), 1101–1124.
15.
FamaE.FrenchK. (1995). Size and book-to-market factors in earnings and returns. Journal of Finance, 50(1), 131–155.
16.
FazeliY. S.RasouliH. A. (2011). Real earnings management and the value relevance of earnings. International Research Journal of Finance and Economics, (62), 28–37.
17.
FrankM.GoyalV. (2003). Testing the pecking order theory of capital structure. Journal of Financial Economics, 67(8), 217–248.
18.
GrahamJ. R.HarveyC. R.RajgopalS. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40(1–3), 3–73.
19.
GuidryF.LeoneA.RockS. (1999). Earnings-based bonus plans and earnings management by business unit managers. Journal of Accounting and Economics, 26(1), 113–142.
20.
GunnyK. A. (2005). What are the consequences of real earnings management?Working Paper, University of Colorado, USA.
21.
GunnyK. A. (2010). The relation between earnings management using real activities manipulation and future performance: Evidence from meeting earnings benchmarks. Contemporary Accounting Research, 27(3), 855–888.
22.
HashemiD. S.RabieeH. (2011). The relation between real earnings management and accounting earnings management: Evidence from Iran. Business and Management Review, 1(8), 25–33.
23.
HealyP. M.WahlenJ. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13(4), 365–383.
24.
IbrahimS.XuL.RogersG. (2011). Real and accrual-based earnings management and its legal consequences: Evidence from seasoned equity offerings. Accounting Research Journal, 24(1), 50–78.
25.
IqbalN.AhmadN.BasheerN. A. (2012). Impact of corporate social responsibility on financial performance of corporations: Evidence from Pakistan. International Journal of Learning & Development, 2(6), 107–118.
26.
JermiasJ. (2008). The relative influence of competitive intensity and business strategy on the relationship between financial leverage and performance. British Accounting Review, 40(1), 71–86.
27.
KangJ. (2013). The relationship between corporate diversification and corporate social performance. Strategic Management Journal, 34(1), 94–109.
28.
KasznikR. (1999). On the association between voluntary disclosure and earnings management. Journal of Accounting Research, 37(3), 57–81.
29.
KeatsB. W.HittM. A. (1988). A causal model of linkages among environmental dimensions, macro organizational characteristics, and performance. Academy of Management Journal, 31(2), 570–598.
30.
KimJ. B.SongB. Y.ZhangL. (2010). Earnings management through real activities and bank loan contracting. Working Paper, City University of Hong Kong.
31.
KlingenbergB.TimberlakeR.GeurtsT. G.BrownR. J. (2013). The relationship of operational innovation and financial performance: A critical perspective. International Journal of Production Economics, 142(2), 317–323.
32.
Kyereboah-ColemanA. (2007). The impact of capital structure on the performance of micro-finance institution. The Journal of Risk Finance, 8(1), 56–71.
33.
LeggettD. M.ParsonsL. M.ReitengaA. L. (2010). Real earnings management and subsequent operating performance. Working Paper, University of Alabama.
34.
LiX. (2010). Real earnings management and subsequent stock returns. Working Paper, Boston College.
35.
LiouiA.SharmaZ. (2012). Environmental corporate social responsibility and financial performance: Disentangling direct and indirect effects. Ecological Economics, 78(1), 100–111.
36.
Mackie-MasonJ. K. (1990). Do taxes affect corporate financing decisions?The Journal of Finance, 45(5), 1471–1493.
37.
MargolisJ. D.ElfenbeinH. A.WalshJ. (2007). Does it pay to be good? A meta-analysis and redirection of research on the relationship between corporate social and financial performance. Working paper, Harvard Business School, Cambridge, MA.
38.
McclellandP. L.BarkerV. L.OhW. Y. (2012). CEO career horizon and tenure: Future performance implications under different contingencies. Journal of Business Research, 65(9), 1387–1393.
39.
MizikN.JacobsonR. (2007). Myopic marketing management: Evidence of the phenomenon and its long-term performance consequences in the SEO context. Marketing Science, 26(3), 361–379.
40.
MyersJ. N.MyersL. A.SkinnerD. J. (2007). Earnings momentum and earnings management. Journal of Accounting, Auditing & Finance, 22(2), 249–284.
41.
PurkayasthaS. (2013). Diversification strategy and firm performance: Evidence from Indian manufacturing firms. Global Business Review, 14(1), 1–23.
42.
RanganS. (1998). Earnings management and the performance of seasoned equity offerings. Journal of Financial Economics, 50(1), 101–122.
43.
RaniP.HussainF. F.ChandP. V. (2013). Managerial incentives for earnings management among listed firms: Evidence from Fiji. Global Journal of Business Research, 7(1), 21–31.
44.
RoychowdhuryS. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42(3), 335–370.
45.
SchipperK. (1989). Commentary on earnings management. Accounting Horizons, 3(4), 91–102.
46.
StiglerG. (1958). The economies of scale. Journal of Law and Economics, 1(1), 54–71.
47.
TabachnickB. G.FidellL. S. (1996). Using multiple statistics. New York, NY: Harper Collins Publishers.
48.
TaylorG. K.XuR. Z. (2010). Consequences of real earnings management on subsequent operating performance. Research in Accounting Regulations, 22(2), 128–132.
49.
TeohS. H.WelchI.WongT. (1998a). Earnings management and the long-run underperformance of seasoned equity offerings. Journal of Financial Economics, 50(1), 63–100.
50.
TeohS. H.WelchI.WongT. (1998b). Earnings management and the long-run underperformance of initial public offerings. Journal of Finance, 53(6), 1935–1974.
51.
ThomsenS.PedersenT. (2000). Ownership structure and economic performance in the largest European companies. Strategic Management Journal, 21(6), 689–705.
52.
UmarM.TanveerZ.AslamS.SajidM. (2012). Impact of capital structure on firm’s financial performance: Evidence from Pakistan. Research Journal of Finance and Accounting, 3(9), 1–13.
53.
ZangA. (2012). Evidence on the trade-off between real activities manipulation and accrual-based earnings management. The Accounting Review, 87(2), 675–703.
54.
ZeitunR.TianG. (2007). Capital structure and corporate performance: Evidence from Jordan. Australasian Accounting Business and Finance Journal, 1(4), 40–53.
55.
ZhuJ. (2000). Multi-factor performance measure model with an application to Fortune 500 companies. European Journal of Operational Research, 123(1), 105–124.
