Fourthly, concerning the research methods, the Performance-Matching Discretionary Accruals Model (Kothari et al. 2005) will be applied to calculate the discretionary accruals as proxy for accrual-based earnings management. It is regarded as an effective and reliable way to capture management choices and discretion reflected in the financial statements since it takes firm performance into consideration which can better reflect discretionary accruals. In their study, Ronen and Yaari (2008) argue that the Performance Matching Model yields stronger results than the Jones Model. Similarly, Dechow et al. (2012) also mention that the Performance Matching Model can to some extent mitigate model misspecification which is better than the Modified Jones Model that is widely used in the previous studies. On the other hand, in terms of real activities manipulation, I adopt the model developed by Roychowdhury (2006) through three main manipulation methods, which are sales manipulation, reduction of discretionary expenditures and overproduction, or increasing production to report lower COGS. Following, I try to measure the quality of audit from four main aspects; those are audit firm size, audit tenure, industry specialization of auditor and audit independence applied in the prior researches, of which will be illustrated in Chapter 2. (Becker et al., 1998; Francis and Krishnan, 1999; Krishnan, 2003; Francis and Yu, 2009; Lin and Huang, 2010) Lastly, aims to investigate the relations between the different variables in this research, a regression analysis in SPSS would be performed according to all the data collected which will be described in Chapter 7. 1.7 Limitations This study is subject to some limitations. First of all, in terms of earnings management measurement, managers can manipulate earnings in various patterns and consequently no one can really find the perfect proxy to accurately indicate the behaviors of earnings management. This paper examines the earnings management from two main aspects, accrual-based and real activities earnings management by using Performance-Matching Discretionary Accruals Model and Roychowdhury
Fourthly, concerning the research methods, the Performance-Matching Discretionary Accruals Model (Kothari et al. 2005) will be applied to calculate the discretionary accruals as proxy for accrual-based earnings management. It is regarded as an effective and reliable way to capture management choices and discretion reflected in the financial statements since it takes firm performance into consideration which can better reflect discretionary accruals. In their study, Ronen and Yaari (2008) argue that the Performance Matching Model yields stronger results than the Jones Model. Similarly, Dechow et al. (2012) also mention that the Performance Matching Model can to some extent mitigate model misspecification which is better than the Modified Jones Model that is widely used in the previous studies. On the other hand, in terms of real activities manipulation, I adopt the model developed by Roychowdhury (2006) through three main manipulation methods, which are sales manipulation, reduction of discretionary expenditures and overproduction, or increasing production to report lower COGS. Following, I try to measure the quality of audit from four main aspects; those are audit firm size, audit tenure, industry specialization of auditor and audit independence applied in the prior researches, of which will be illustrated in Chapter 2. (Becker et al., 1998; Francis and Krishnan, 1999; Krishnan, 2003; Francis and Yu, 2009; Lin and Huang, 2010) Lastly, aims to investigate the relations between the different variables in this research, a regression analysis in SPSS would be performed according to all the data collected which will be described in Chapter 7. 1.7 Limitations This study is subject to some limitations. First of all, in terms of earnings management measurement, managers can manipulate earnings in various patterns and consequently no one can really find the perfect proxy to accurately indicate the behaviors of earnings management. This paper examines the earnings management from two main aspects, accrual-based and real activities earnings management by using Performance-Matching Discretionary Accruals Model and Roychowdhury