Japanese Firms’ Real Activities Earnings Management to Avoid Losses

Abstract

This paper investigates if Japanese firms that report small positive profits participate in earnings management through real activities manipulation to avoid reporting losses. The evidence indicates that these firms upwardly manage earnings by cutting discretionary expenses and overproducing. Meanwhile, the findings also suggest that they simultaneously record income-decreasing accruals, suggesting that firms reporting small positive profits have a stronger incentive to avoid reporting losses.