Publication Type
Journal Article
Version
publishedVersion
Publication Date
9-2022
Abstract
We examine the implications of insider trading restrictions on firms’ real activities earnings management in an international setting. Using a sample of 28 countries over the period from 1992 to 2007, we find evidence that is supportive of the substitution hypothesis, in that managers have incentives to substitute accruals earnings management for real activities earnings management. This effect is found to be more pronounced for firms in countries with more restrictive insider trading regulation. Our result is robust to alternative measures of real activities earnings man- agement and insider trading restrictions, alternative sub-samples, alternative regression specifi- cations, and controlling for endogeneity. In addition, we find that the positive association between insider trading restrictions and the substitution effect is more prominent for firms in countries with strong institutional infrastructure. Overall, our results are important in high- lighting the role of insider trading restrictions in shaping corporate financial reporting policies. In particular, we find strong evidence to suggest that the extent of restriction of such laws influence managerial incentives to engage in earnings manipulation through real activities.
Keywords
Insider trading laws, Real earnings management, Substitution effect
Discipline
Accounting | Finance and Financial Management
Research Areas
Corporate Governance, Auditing and Risk Management
Publication
Journal of International Financial Markets, Institutions and Money
Volume
80
First Page
1
Last Page
21
ISSN
1042-4431
Identifier
10.1016/j.intfin.2022.101641
Publisher
Elsevier
Citation
WANG, Jiwei; KUSNADI, Yuanto; WANG, Jiwei; and WANG, Yujie.
Insider trading restrictions and real earnings management: International evidence. (2022). Journal of International Financial Markets, Institutions and Money. 80, 1-21.
Available at: https://ink.library.smu.edu.sg/soa_research/1985
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1016/j.intfin.2022.101641