Both budgetary slack and earnings management
are managementûs intentional interventions to
produce some private gains at the expense of others.
The former is biasing of performance targets and
the latter is biasing the financial reporting. If
budget achievability is managementûs goal, two
possible interventions to achieve the budget are
building slack into the budget (i.e., set earnings
target less than the best estimate) and managing
earnings through discretionary accruals. A large
body of archival research presents substantial
evidence that both budgetary slack and earnings
management exist in most entities. This study
intends to investigate whether and how budgetary
slack associates with discretionary accruals.
This study employs both primary data from
mailed survey questionnaires and secondary data
from the annual financial statements in the analysis.
The sample is companies listed1
on the Stock
Exchange of Thailand (SET) and the Market for
Alternative Investment (MAI) as of the year ended
2009, all of which use budget for performance
evaluation. This study excludes companies in
financial industry and companies under rehabilitation
for the reason that their financial reporting requirements
and their characteristics of business operation
are different. Survey data on budget figures of the
year ended 2009 and perceived budget achievability
are gleaned from the management at the corporate
level of the listed companies to match their
companiesû annual financial statements. The final
set of samples in this study consists of 38 firms,
representing 10% of total population (387 firms).
The small sample size is due to the difficulty in
obtaining the firmûs internal and confidential data.
Similar to prior literature, this study relies
on the respondentsû perceptions of the achievability
of their annual earnings targets to measure budgetary
slack. For earnings management, the cross›sectional
modified Jonesû (1995) model (Dechow, Sloan and
Sweeney, 1995) is employed to determine discretionary
accruals. The sample in this study is partitioned into
(1) firms that achieved their annual earnings
targets and firms that did not (for robustness test,
we also partition the sample into firms that achieved
their annual earnings targets before managing earnings
and the firms that did not), and (2) firms that chose
income›increasing and income›decreasing earnings
management, to separately examine the linkage of
budgetary slack to discretionary accruals and to
compare whether the results are dissimilar.
Generally, the results show some evidence
that there is a linkage of budgetary slack to discretionary
accruals. Specifically, the firms that already
achieved their annual earnings targets as well as
Both budgetary slack and earnings managementare managementûs intentional interventions toproduce some private gains at the expense of others.The former is biasing of performance targets andthe latter is biasing the financial reporting. Ifbudget achievability is managementûs goal, twopossible interventions to achieve the budget arebuilding slack into the budget (i.e., set earningstarget less than the best estimate) and managingearnings through discretionary accruals. A largebody of archival research presents substantialevidence that both budgetary slack and earningsmanagement exist in most entities. This studyintends to investigate whether and how budgetaryslack associates with discretionary accruals.This study employs both primary data frommailed survey questionnaires and secondary datafrom the annual financial statements in the analysis.The sample is companies listed1 on the StockExchange of Thailand (SET) and the Market forAlternative Investment (MAI) as of the year ended2009, all of which use budget for performanceevaluation. This study excludes companies infinancial industry and companies under rehabilitationfor the reason that their financial reporting requirementsand their characteristics of business operationare different. Survey data on budget figures of theyear ended 2009 and perceived budget achievabilityare gleaned from the management at the corporatelevel of the listed companies to match theircompaniesû annual financial statements. The finalset of samples in this study consists of 38 firms,representing 10% of total population (387 firms).The small sample size is due to the difficulty inobtaining the firmûs internal and confidential data.Similar to prior literature, this study relieson the respondentsû perceptions of the achievabilityof their annual earnings targets to measure budgetaryslack. For earnings management, the cross›sectionalmodified Jonesû (1995) model (Dechow, Sloan andSweeney, 1995) is employed to determine discretionaryaccruals. The sample in this study is partitioned into(1) firms that achieved their annual earningstargets and firms that did not (for robustness test,we also partition the sample into firms that achievedtheir annual earnings targets before managing earningsand the firms that did not), and (2) firms that choseincome›increasing and income›decreasing earningsmanagement, to separately examine the linkage ofbudgetary slack to discretionary accruals and tocompare whether the results are dissimilar.Generally, the results show some evidencethat there is a linkage of budgetary slack to discretionaryaccruals. Specifically, the firms that alreadyachieved their annual earnings targets as well as
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