Effects Of Key Financial Indicators On Earnings Management In Korea’s Ready Mixed Concrete Industry

Abstract

Earnings management is the practice of deriving certain benefits by intervening in external financial reporting or misleading certain stakeholders through adjustments to accruals without cash flow involvement or with affecting cash flows through real activities. Using the models of Kothari et al. (2005) and Cohen et al. (2008) for accrual-based earnings management (AEM) and real activities earnings management (REM), respectively, we examined whether relationships exist between key financial indicators, such as cash flows from operations, operating income, and debt dependency level, and AEM and REM in the ready mixed concrete (RMC) industry in Korea. This study is the first to investigate earnings management in Korea’s RMC sector. Results showed that operating income and cash flows from operations are significantly negatively related to AEM and REM, consistent with the findings of previous research. By contrast, debt dependency exhibits no significant relationship with AEM and REM, contradicting the findings of most previous studies. As a moderating variable, operating income affects the relationship between cash flows from operations and earnings management with only REM. On these bases, we can infer that earnings management in the Korean RMC industry responds differently to key financial indicators with regards to AEM and REM practice. Overall, companies in the industry implement aggressive earnings management depending on operating income and cash generation ability level rather than debt dependency level. These findings provide important insights for people who are interested in accounting information on the RMC industry in Korea.