Does Real Activities Management Influence Earnings Quality? Analysis on the Persistence of Earnings and Cash Flows and Future Earnings Reflected in the Stock Return

We explore the association between real earnings management and earnings quality. Specifically, we examine whether real activities management influences the persistence of earnings and cash flows, respectively. Further, we investigate the effect of real management on the relation between current stock returns and future earnings. Using 15,826 firm-years observations listed in the Korean stock market from 2000-2015, we find that real earnings management is negatively associated with the persistence of current earnings for future earnings. We also find that real management restricts the persistence of cash flows for future cash flows. Lastly, we find that real earnings management prevents the market from assessing firms’ future earnings in the current stock prices. Overall, our findings are consistent to the argument that decreased persistence of earnings and cash flows explains the negative relation between real earnings management and firm value.