RESEARCH WRITING Final Draft Cover Page
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Abstract
Engaging real earnings management in listed firms was considered to be detrimental to subsequent performance of firms and audit quality in previous research. This paper argues that despite the negative effects, real earnings management can be beneficial for listed firms. On the one hand, from the perspective of Signaling Theory and Agency Theory, future performance of listed firms benefits from engaging REM. On the other hand, REM is also positively associated with audit quality. This paper presents empirical evidence from recent research to support this argument; in addition, suggestions are made for keeping the extent of REM at a reasonable level in order to make the most of REM.
1.Introduction
Owing to the scandals of listed firms such as Enron, the Sabanes-Oxley Act was introduced to keep the accuracy of the accounting system. In order to deal with the strict scrutiny, managers began to replace traditional accrual earnings management (AEM) with real earnings management (REM), which is becoming increasingly important in business practices.
Research on REM, also known as ‘earning management’ through real activities manipulation, started rather late compare to that on AEM. REM was firstly presented by Schipper (1989), aiming to alter financial earnings or
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