7. Conclusion
We investigate how firms use RPTs to manage their reported earnings. Some prior evidence indicates that RPTs may be considered a tool to manipulate reported earnings. However, it is unclear whether RPTs are used independently to manage earnings or maybe used in conjunction with other techniques to manipulate accruals or real activities of a firm. In the latter instance, we would conclude that RPTs are likely being used to indirectly manage earnings. A third possibility is that they reflect normal transactions conducted for legitimate commercial purposes.
To address the issue, we investigate the association between RPTs and both real and accrual-based earnings management indicators for firms listed on the ASE. Following Zang (2012) we measure accrual earnings management using discretionary accruals (Jones, 1991) and real earnings management by discretionary cash flow from operations, discretionary production costs and discretionary expenses (Roychowdhury, 2006). The results indicate that RPTs are more likely to be used as a standalone tool to manage earnings and act as a substitute for real earnings management.
The results show no systematic relationship between RPTs and accrual-based earnings management. Second, our results show that the substitution effect is only present in firms audited by a non-Big 4 auditor. The results are robust to alternative specifications of our models. In our robustness tests, we try to rule out the possibility that our results are biased due to our research design choices.
