The Relationship Between Accrual-Based Earnings Management and Real Earnings Management: Reference to the Polish Capital Market

Abstract Research background: The literature on the subject matter emphasizes the lack of empirical research on the relationships between accrual-based earnings management (AEM) and real earnings management (REM), while studies conducted so far are characterized by highly ambiguous results. Purpose: The main aim of the paper is to present the results of empirical research on the relationships between the AEM and REM practices used to create financial results in industrial public companies listed on the WSE. Research methodology: The research sample concerns 72 listed companies whose shares were traded on the Warsaw Stock Exchange (WSE) for a minimum 13 years in the adopted reference period of 2003–2017. The estimation of AEM and REM practices was made by using: the Jones model, the Kang-Sivaramakrishnan model and the Roychowdhury methodology. Results: The empirical results allowed showing the existence of a statistically significant, negative relationship between discretionary accruals and the abnormal level of an operational cash flow indicator, as well as between discretionary accruals and the total REM indicator. An in-depth cross-sectional analysis showed the existence of significantly differentiated relationships between the studied variables in individual branches of industry. Novelty: Research on the relationship between AEM and REM practices in the context of the Polish capital market has not been carried out so far, hence it can be considered a new research area in which there is a justified need to deepen theoretical and empirical research on the EM phenomenon.