Employee tenure and earnings management through real activities manipulation

ABSTRACTWe extend prior studies on the role of employee on financial reporting by investigating the relation between employee tenure and earnings management through real activities manipulation. On the one hand, employees with longer tenure would be better in detecting real activities manipulation with better knowledge and experience on daily operations, yielding a negative relation between employee tenure and real earnings management. On the other hand, employee tenure would be positively associated with earnings management through real activities manipulation if rent-seeking managers persuade long-tenured employees who have a better ability to control daily operation, or if employees with longer tenure believe that real activities manipulation benefits the long-term survival of the firm. Our empirical analysis presents the positive relation between employee tenure and upward earnings management via reduction in discretionary expenses and overproduction. Further, we find that the positive association between employee tenure and REM could be attributable to employees’ collaboration in response to managerial efforts to provide the benefit to the firm by building creditability with the capital market and by signaling future better performance.