The Impact of Earnings Management on the Likelihood of Becoming a Marginal Firm: Focusing on the Food Manufacturing Industry

Abstract

This study aims to investigate whether earnings management in the food manufacturing industry influences the likelihood of becoming a marginal firm. Specifically, it examines which method—accrual-based earnings management (AEM) or real activities-based earnings management (REM) has a greater impact on the likelihood of becoming a marginal firm. The analysis results indicate that the greater the extent of earnings management by managers, the higher the likelihood of transitioning into a marginal firm in the future. In other words, despite the potential negative impact of REM on future firm value, managers are more incentivized to engage in REM over AEM when the likelihood of becoming a marginal firm is high. Among the REM methods, earnings management through temporary sales increases by offering price discounts and relaxing credit policies, as well as reducing discretionary expenses, significantly impacts the likelihood of becoming a marginal firm. This study has significant implications by presenting the degree of real earnings management as a new financial characteristic variable to be considered by regulatory authorities when making support or exit decisions for food manufacturing firms.