Real Activities Manipulation and Accrual Based Earnings Management: Evidence from Russia

The object of the study is abnormal levels of production costs and discretionary accruals in Russian companies. The subject of the study are the costs of accrual based and real activities earnings manipulation. The purpose of the study is to determine the relative costs, which managers are facing, and how they affect their decision to choose between types of earnings manipulation. The purpose of the research will be achieved with an analysis of a system of regressions. Firstly, the abnormal levels of production costs and discretionary accruals will be measured in different industries. Secondly, costs constraints of real activities manipulations and accrual-based earnings management will be estimated. The paper begins with overview of the types and motives of two types of earnings manipulation, followed by relevant literature review on costs of such activities. The next section is about the methodology used to investigate the level of such costs, and includes data used for the research and sample characteristics. The last section includes empirical results of my work. The paper ends with a conclusion and summary of inferences. The relevance of this paper is that there is not much evidence from russian companies about the use of real activities manipulation and accrual based earnings management. Results of this work can be used by investors to understand the real performance of the company not looking through the prism of financial statements and by regulators in order to recognise the potential profitability manipulation level of the particular company.