Real Earnings Management in Sales

Abstract

We surveyed 1,638 sales executives, across 40 countries, regarding their companies’ likelihoods to ask sales to perform real-earnings-management (REM) actions when earnings pressure exists. Using this information, which we refer to as companies’ REM propensities, we study how company characteristics and environmental conditions relate to the responses received. The use of cash-flow incentives for sales personnel and the distribution of interfunctional power in favor of finance rather than sales are both associated with companies’ REM propensities. In addition, we show that sales executives preemptively change their behaviors in anticipation of top management’s REM requests. Sales executives working for public companies and companies in the United States reported higher levels of REM propensity. The data also support an association between REM propensity and finance-sales conflict. These findings and others are compared and contrasted with existing empirical and survey-based research on REM throughout the paper.