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An analysis of the positive effect of real earnings management on financial performance

Lim, Hyoung Joo; Mali, Dafydd

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Hyoung Joo Lim

Assistant Professor in Accounting


REM models infer abnormal levels of cashflow from operations (AbCFO), selling, general and admin (AbSGA) and production expenses (AbProd) are opportunistic, based on the supposition that engaging in real activities to meet current earnings targets (t) will negatively influence future performance (t+1). However, from a firm productivity perspective, cost reduction (via AbCFO, AbProd and AbSGA) is interpreted as an efficiency enhancing business strategy. This study therefore differentiates between (1) firms with ineffective management that have engaged in AbCFO, AbProd and AbSGA to achieve an optimal resource-cost mix to generate sales (REMF) and (2) firms with effective management that have not (OEF).

Using a sample of Korean listed firms over the 2000–2016 sample period, the study utilizes data envelopment analysis to capture the capability of management to generate sales from resources that are directly under their control. The study then compares the incremental effect that managerial decision making can have on real earnings management (REM) and future firm performance (period t+1 to t+5).

The study makes two important contributions. First, consistent with the efficiency/productivity literature, but contrary to seminal REM studies, empirical results shows that AbCFO, AbProd and AbSGA improve firm performance in period t and t+1 (to t+5), demonstrating “REM” is not opportunistic by default. Second, OEF have higher financial performance compared to REMF, in periods t and t+1.

The study therefore invokes resource-based theory and data envelopment analysis to integrate managerial effectiveness (human capital) into REM modelling. The study therefore extends the basic REM residual model.


Lim, H. J., & Mali, D. (2023). An analysis of the positive effect of real earnings management on financial performance. Asian Review of Accounting, 31(2), 284-316.

Journal Article Type Article
Acceptance Date Jan 1, 2023
Online Publication Date Jan 17, 2023
Publication Date Mar 20, 2023
Deposit Date Jan 23, 2023
Publicly Available Date Jan 24, 2023
Journal Asian Review of Accounting
Print ISSN 1321-7348
Electronic ISSN 1758-8863
Peer Reviewed Peer Reviewed
Volume 31
Issue 2
Pages 284-316
Keywords firm performance; efficiency; real earnings management; South Korea; data envelopment frontier analysis
Public URL
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