Do Material Weakness Firms Have Opportunistic Earnings Management? : Evidence from Japan

Abstract

This study examines whether earnings management of sample firms that disclosed material weaknesses in internal control reports reflects managerial opportunism or informativeness. Informative earnings management is defined as earnings management which indicates an appropriate prediction and improves accruals quality, and opportunistic earnings management is defined as earnings management which indicates an inappropriate predication and lowers accruals quality in this study. I find the following: (1) based on the results that predictive accuracy is significantly associated with accruals quality, it is likely that earnings management of sample firms reflects managerial opportunism; (2) since discretionary accrual is significantly related to accruals quality, it is likely that earnings management of sample firms reflects accruals management with managerial opportunism by using discretionary accrual; and (3) based on the results that accruals quality of sample firms is significantly associated with accruals, it is likely that the sample firms have earnings management by using accruals and decline accruals quality.