Real Earnings Management and Management Discussion and Analysis (MD&A)

[Purpose] The purpose of this study is to explore the association between the real earnings management and firms’ disclosure behaviors in the MD&A section of the annual report. [Methodology] I review prior literature and collect data of firms listed on Korean stock markets. Using 3,097 firm years from year 2010 to year 2017, I run OLS regressions models to examine the association between real earnings management and MD&A disclosures. [Findings] I find that real earnings management is positively associated with the scores of MD&A disclosure quality. Also, additional test results indicate that the positive relation between real earnings management and MD&A scores is primarily driven by firms’ overproduction activities, rather than other real earnings management activities such as channel stuffing or abnormal reduction of discretionary expenses. [Implications] The findings of this study indicate that firms with real earnings management are likely to make more expansive MD&A disclosures. This study can provide an interesting insight on how managers try to use the MD&A as a strategic communication channel when they have made opportunistic decisions such as earnings management activities.