Are Managers Motivated for Earnings Management through Interim Financial Statements: An Empirical Study Public Companies in Thailand


  • P. Krissadee Lecturer, Faculty of Business Administration, Thai-Nichi Institute of Technology, Thailand


Purpose of the Research: This study aims to examine whether interim financial statements prepared by public companies in Thailand provide a leverage for corporate managers to manipulate their quarterly income reported in interim financial statements, which are not mandatory to be audited as against annual financial statements. managers, As explained by the agency theory, investors would react to financial performance and therefore, it could be always argued that managers to show a better picture of the company performance when such an opportunity prevails. Owing to business dynamism and the speed at which technology alters business operation, one-year period would be too late for investors to know about financial performance of the company through the annual report. Hence, there is a strong justification for providing updated and frequent financial information through interim financial statements by a corporation as a result of a regulatory requirement of Stock Exchange of Thailand and on the other hand, it would open a room for managers to manipulate the numbers in quarterly report until the annual report is submitted.

Research Design: Quantitative methodology is used and accordingly, it is hypothesized that managers, in line with the agency theory d to manipulate earning figures in interim financial statements. Data is collected from interim financial statements and annual reports of SET 50 companies for last 10 years ending 2020. Summation of quarterly financial performance is compared with annual financial performance presented in annual reports through a paired t-test to find evidence for manipulation. Further, smoothing tests were carried out to see whether there were significant differences prevailed among quarterly earnings.

Findings: The study does not find any evidence to prove that there is a significant difference between the summation of quarterly performances of one year and the profit for the year reported in the annual report. This could be justified by the recent development of International financial reporting standards which have a little flexibility for managers use the judgment in preparing financial statements. However, there were significant differences among quarterly earnings thus indicating that manipulation takes in quarterly reports but not in annual reports thus revealing the final quarter earning has been used to iron out the differences of earnings shown in first three quarters. Significant variation of earnings in the final quarter was seen compared to other quarters. Findings hold the relevance of propositions of agency theory as managers could make use opportunity to do so with the flexibility for preparing interim financial statements.

Implication of The Research: Variations of quarterly earnings arising from manipulations are seen to have been adjusted by using the earnings reported in the last quarter in order to match it with annual earnings reported in annual reports based on IFRSs which do not leave much room for manipulation. Hence, the outcome of this research adds to the body of knowledge in the field of accounting and finance. Research findings can be linked decisions taken by capital market regulatory bodies, standards setting bodies and researchers. Usefulness and relevance of financial information in investment decisions can be linked to interim report in future dimensions of research and further the efficient market hypotheses should also be tested to see the relation between such hypotheses the possibilities of earnings management particularly in the stock market in Thailand and other capital markets in general.

Keywords: Financial Information, Interim Financial Statements, Quarterly Earnings, Annual Reports, Income management, Income smoothing