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Real earnings management in Thailand: CEO duality and serviced early years

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 Asia-Pacific Journal of Business Administration
Real earnings management in Thailand: CEO duality and serviced early years
Sirada Nuanpradit,
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APJBA
11,1
88
Received 11 August 2018
Revised 18 December 2018
Accepted 22 December 2018
Downloaded by THAKSIN UNIVERSITY At 22:00 18 March 2019 (PT)
Asia-Pacific Journal of Business
Administration
Vol. 11 No. 1, 2019
pp. 88-108
© Emerald Publishing Limited
1757-4323
DOI 10.1108/APJBA-08-2018-0133
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1757-4323.htm
Real earnings management
in Thailand: CEO duality
and serviced early years
Sirada Nuanpradit
Economics and Business Administration Faculty,
Thaksin University, Songkhla, Thailand
Abstract
Purpose – The purpose of this paper is to investigate the individual and interaction effects of chief executive
officers (CEO)-chairman leadership structure (CEO duality) and CEO-serviced early years (the first three years
in office) on real earnings management (REM) through sales activities of listed firms in the Stock Exchange of
Thailand (SET).
Design/methodology/approach – The longitudinal data on CEO and chairman names of 3,825 firm-year
observations were manually gleaned from the SET market analysis and reporting tool and the annual reports
from 2001 to 2015. Multiple regressions were utilized to analyze the effects.
Findings – The findings show a positive relationship between CEO duality and sales-driven REM. However,
the CEO-serviced early years have no association with sales-driven REM. The CEO duality/serviced early
year interaction effect is positively correlated to sales manipulation. In addition, firms with the CEO duality
engage in upward or downward sales-driven REM, while firms with newly appointed CEO adopt only the
upward sales-driven REM. In firms which their newly appointed CEO concurrently serves as chairman, either
upward or downward sales-driven REM strategy is introduced.
Practical implications – The findings provide some grounds for capital market and regulators to exercise
caution when it comes to firms with the newly appointed CEO and/or the CEO duality, given a high tendency
to manipulate sales revenues.
Originality/value – This study is the first to investigate the relationship between the CEO duality/serviced
early years on sales-driven REM. The findings are expected to complement existing publications on REM.
Keywords CEO duality, Real earnings management, Sales activity manipulation, Serviced early years
Paper type Research paper
Introduction
Real earnings management (REM) is a managerial strategy involving with altering timing or
patterns of normal business activities that include operating activities (e.g. sales, production,
discretionary expenditure), financing activities (e.g. stock option issuances, stock repurchases)
and investing activities (e.g. long-term asset acquisition or disposition, research and
development (R&D) expenditure) to meet a short-term earnings target. Graham et al. (2005)
documented that the REM strategy was exploitatively utilized by chief executive officers (CEO)
in the USA, despite adverse effects on future cash flows. According to Kim and Park (2013), Kim
and Sohn (2013), Commerford et al. (2016), Abad et al. (2016), Kothari et al. (2016) and Mellado-Cid
et al. (2017), real activity manipulation contributes to higher risk premiums demanded by
investors, lower post-seasonal equity offering (SEO) performance, auditors’ discomfort, elevated
information asymmetry and impaired firm value. REM also incurs greater agency costs.
An ideal leadership structure should help forge a mutual collaboration between CEOs
and board members that averts prioritizing myopic earnings strategies over long-term
growth and competitiveness. Under agency theory, the CEO-chairman role combination
establishes dependence, decreases board monitoring effectiveness and increases CEO
entrenchment (Daily and Dalton, 1997). The monopoly of power and control of CEO duality
is often associated with outperformance, bankruptcy risk and overly impressive financial
This research was support by the 2017 grant of Thaksin University, Songkhla, Thailand
(No. R01-2560A10502034).
 reports (Rechner and Dalton, 1991; Boyd, 1995; Daily and Dalton, 1994; Davidson et al., Real earnings
2004), thus inducing real activity manipulation to maintain the status quo. On the other management
hand, stewardship theory argues that the combined role of CEO and chairman restrains in Thailand
agency costs, informational costs and managerial succession costs (Brickley et al., 1997).
Interestingly, no correlation exists between the dual leadership structure and accrual-based
earnings management (Qaiser Rafique and Abdullah Al, 2016).
In competitive CEO labor market, corporate performance is a crucial barometer of CEO 89
capabilities and oftentimes leads to myopic business strategies to manipulate the short-term
earnings. Moreover, high expectations of the incoming CEOs to outperform the outgoing
CEOs inadvertently encourage REM, especially when the new CEOs’ equity incentives are
unaligned with the interests of shareholders (Fabrizi and Parbonetti, 2017). According to
Datta et al. (2003), new CEOs with openness characters would challenge the conventional
practices with new and untried strategies, e.g. changes in adverting and R&D policies. This
is consistent with Alderson et al. (2014), who documented that riskier policies are likely
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adopted in the first few years following new CEO appointments due to low stock price
sensitivity. Zhang (2008) reported that the information asymmetry between the board of
directors and a new CEO leads to the board’s inability to accurately assess the competency
of the new CEO.
The objectives of this research are to examine the individual and interaction effects of the
CEO duality and the CEO-serviced early years (the first three years in office) on REM
through sales activities of listed firms in the Stock Exchange of Thailand (SET). The
motivations to study in the context of Thailand are manifold.
First, the roles of the board of director which functions as a check-and-balance
mechanism were not implemented in Thailand characterized by family ownership
concentration because family group management often made decisions without outside
monitoring mechanism (Hongcharu, 2006). According to Jira and Siriyama Kanthi (2010), the
CEO-chairman dual structure deteriorates the value of Thai listed firms, suggesting that the
dual structure reduces board monitoring effectiveness. Building on the aforesaid, this
current research further investigates the effect of dual leadership structure on REM through
sales activity manipulation (i.e. sales-driven REM).
Moreover, Parichart et al. (2012) reported that in Thailand the board of director would
replace the underperforming CEOs, indicating that stakeholders anticipate high corporate
performance to the incoming CEOs and thereby a motivation for the new CEOs to engage in
the short-term earnings manipulation. According to Theeravanich (2013), Thai executive pay
depends on the firms’ both future and present prospects (market- and accounting-based
performance). This current research examines whether the relationship between CEO-serviced
early years in office and the sales-driven REM exists in the context of Thailand.
Lastly, existing research on the determinants of REM in advanced economies, mostly in
the USA, focused on the regulation, internal control, equity issuance aspects (Cohen et al.,
2008; Cheng et al., 2016; Järvinen and Myllymäki, 2016; Cohen and Zarowin, 2010) and
managerial incentive issues centering on executive age and pay disparities (Fabrizi and
Parbonetti, 2017; Park, 2017). Meanwhile, in less advanced economies, the focus was shifted
to directorships, e.g. multiple directorships in Saudi Arabia (Kais et al., 2017), director
gender in China (Luo et al., 2017). Nevertheless, there exist limited publications on the
association between sales-driven REM and CEO duality/serviced early years in office.
In this research, longitudinal data on CEOs and chairs of the board were manually
gleaned from the SET Market Analysis and Reporting Tool (SETSMART) and the firms’
annual reports over the period of 2001–2015 to identify the duality and serviced early years
of the CEOs, with the starting-year data going back to 1998. Absolute values of abnormal
operating cash flows were used as the proxy of sales-driven REM. Cross-sectional ordinary
least squares (OLS) regression, given 3,825 non-financial Thai listed firm-year observations
 APJBA and controlling for firm size, financial performance, growth opportunity, financial
11,1 leverage and year and industry fixed effects indicated a strong positive relation between
CEO duality and sales-driven REM but no association between CEO-serviced early years
and sales manipulation. In addition, the sales-driven REM is positively correlated with the
interaction term between CEO duality and CEO-serviced early years.
This study provides several additional and sensitivity analysis. First, additional tests
90 were carried out whereby the firm-year observations were subsampled into upward and
downward manipulation groups according to the operating cash flows residual.
The findings showed that CEOs who also serve as board chairman tend to engage in
sales-driven REM through either upward or downward direction. Nevertheless, the newly
appointed CEOs have a higher propensity to manipulate sales revenue with only the upward
direction during the first three years of their service. Meanwhile, the newly appointed CEOs
who simultaneously serve as chairman have a tendency to engage in either upward or
downward sales-driven REM. Second, the fixed effect models were replaced with the
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random effect models that the latter assumes the existence of random time variations across
the sample. The results were consistent with those of the main test.
Third, this study examined the effects of CEO duality/-serviced early years on
discretionary accruals, and the results were robust to accrual-based earnings management
measure. Additionally, the findings showed the positive association between
CEO-serviced early years and the discretionary accrual measure. Fourth, the study
estimated a two-stage least squares (2SLS) regression to alleviate concerns for
endogeneity issue which CEO duality might be endogenous. By using instrumental
variables, i.e. market concentration and meeting/beating of analyst earnings forecast,
derived from prior research, the findings of the 2SLS models are similar to those of the
OLS models, therefore the conclusions are not sensitive to endogeneity. Last, the results of
subsampling into manufacturing and non-manufacturing groups showed that
non-manufacturing firms manage real earnings, if their CEOs also serve as chairman
and service during the first three years.
The contributions of this empirical research are manifold. First, to the best of my
knowledge, this research is the first to establish the association between sales-driven REM,
the CEO duality and the CEO-serviced early years, particularly in the emerging economy.
The findings are expected to complement existing publications on REM, e.g. Fabrizi and
Parbonetti (2017), Park (2017), Kais et al. (2017) and Luo et al. (2017). Next, this research
extends previous publications on dual leadership structure in which the CEO-chairman
structure in emerging economies is positively correlated with accrual-based earnings
management, including India, Malaysia and Nigeria (Sarkar et al., 2008; Muslim Har Sani
et al., 2012; Miko and Kamardin, 2016). Specifically, this current research revealed that the
CEO duality encourages sales activity manipulation and managerial entrenchment,
consistent with the agency theory.
Furthermore, the findings add the evidence to the literature on the implicit managerial
incentives in Ali and Zhang (2015) who found the positive relationship between the new
CEO and discretionary expenditure manipulation in the USA by providing the evidence on
the association between the CEO-serviced early years and sales-driven REM in Thailand
emerging economy. Lastly, the findings provide some grounds for financial markets,
auditors and regulators to exercise caution when it comes to firms with the newly appointed
CEOs and/or adopting the dual leadership structure, given the high tendency to engage in
REM through sales activities.
The organization of this research is as follows. The second section describes background
literature, and the third section details theories and hypothesis development. The fourth
section discusses the research methodology while the fifth section presents the research
findings. The concluding remarks are provided in the sixth section.
 Background literature Real earnings
Real earnings management management
Earnings management involves managers’ selecting the accounting reporting methods and in Thailand
estimates (i.e. adjustment on accrual components, hereafter called accrual-based earnings
management) or restructuring the accounting transactions (i.e. adjustment on cash flow
components, hereafter called real activity-based earnings management or REM) in the
financial reports. Both accrual and real earnings are managed for three purposes: capital 91
market, regulatory and compensation contract. For capital market purposes, earnings are
manipulated to influence stock prices before equity issuance, acquisition and repurchase; or
to meet analysts’ earnings expectations. For regulatory purposes, firms decrease earnings to
avoid regulatory scrutiny or political consequences. Under compensation contracts, explicit
(e.g. bonus plan) and implicit (e.g. reputation, job security) managerial compensations induce
earnings management to align interests between the managers and external stakeholders
(Healy and Wahlen, 1999).
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Recent studies have increasingly shifted the focus to REM, e.g. Zang (2012) and Gao et al.
(2017). Cohen et al. (2008) argued that the enactment of the 2002 Sarbanes-Oxley Act
discourages accrual manipulation but encourages real activity manipulation. In real activity
manipulation, timing or structuring of the accounting transactions is altered through
operating, investing or financing activities to achieve earnings thresholds. REM activities
encompass sales manipulation, under/overproduction, discretionary expenditures
management, long-term asset acquisition/disposition or stock repurchases. In fact,
managed activities mislead investors into believing that the performance is achievable in
the normal course of operation. According to Kothari et al. (2016), real activity management
challenges investors to detect abnormal managerial actions and the effects on the firms’
future performance. Moreover, the controversial REM activities could be legitimately
carried out under the generally accepted accounting principles or current regulatory
frameworks, e.g. effective internal control systems under Section 404 of the Sarbanes-Oxley
Act ( Järvinen and Myllymäki, 2016).
To the question of why REM exists, Cohen and Zarowin (2010) and Salma et al. (2011)
reported that SEO firms engage in real activity manipulation due to capital market
pressures and litigation risks. Meanwhile, Dhole et al. (2016) noted that CEOs’
compensations tied to firms’ financial leverage decrease real activity manipulation. Park
(2017) documented that the pay disparities between CEOs and the subordinate layers of
executives induce real activity manipulation because of intense competition for the top
position. According to Cheng et al. (2016), the longer the remaining years of employment the
key subordinate executives have, the less the engagement in real activity manipulation. Chi
et al. (2016) noted that politically connected CEOs significantly employ REM. Luo et al.
(2017) and Na and Hong (2017) reported that REM is considerably lower in firms with female
directors or CEO. Kais et al. (2017) documented that REM increases with the number of
multiple directorships that the directors hold in other firms. According to Anagnostopoulou
and Tsekrekos (2017) and Gao et al. (2017), higher leveraged firms engage more in real
activity manipulation. However, Kim et al. (2017) found that REM decreases in firms from
the countries with weak future-time reference language.

CEO power
The dual leadership structure contributes to the centralization of authority whereby the
CEO possesses supreme power over resources allocation and strategic decisions
(Firstenberg and Malkiel, 1994). The consolidation of power, despite the strengthened
unity of command, restricts the board’s ability to monitor and discipline the CEO
(Finkelstein and D’Aveni, 1994). According to Sarkar et al. (2008), Muslim Har Sani et al.
(2012) and Miko and Kamardin (2016), CEO duality in India, Malaysia and Nigeria,
 APJBA respectively, leads to accrual-based earnings management. Meanwhile, in the USA and the
11,1 UK, Halioui et al. (2016), Jermias and Gani (2014) and Veprauskaitė and Adams (2013)
argued that CEO duality exerts negligible influence on accrual earnings management and
financial aggressiveness. However, according to Lai and Tam (2017) and Qaiser Rafique and
Abdullah Al (2016), the relationship between CEO duality and earnings manipulation is
inconclusive. Lewellyn and Fainshmidt (2017) noted that the structural power by CEO
92 duality does not solely determine CEO power as there are other sources of CEO power, e.g.
as voting, expert and information power. Thus, the leadership structure minimally
influences the financial performance or aggressiveness.

New CEO career concerns

According to Meyer and Vickers (1997), the remunerations and labor-market value of a CEO
are a function of firm’s financial performance. Since the labor market bases the CEOs’
compensations on their current performance, they would be highly concerned about future
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career prospects. Fama (1980) argued that regardless of the attractiveness of explicit
incentive contracts, CEOs are strongly motivated by implicit incentives, e.g. reputational
concerns and job security. Holmström (1999) noted that in the absence of incentive contracts,
CEOs usually make great efforts during the early years in office to impress the market but
fizzle out in the later years. According to Cella et al. (2017), earnings are possibly managed
during the early years of CEO service to showcase the managerial potential but the
manipulation behavior is less frequent as the CEO tenure increases.
Prior research on the CEO behaviors during their early years of service is nevertheless
limited and focused on the developed market. Specifically, Kuang et al. (2014) documented
that firms with new outside CEOs report income-increasing accrual manipulation during
their early years in office. Ali and Zhang (2015) further examined the early year effect on
REM and found that newly appointed CEOs tend to overstate accounting earnings by
deliberately not taking full account of discretionary expenses during the initial years of
service; and that the overstatement behavior is mitigated if the firms are closely monitored
by independent boards, institutional ownership or analysts. According to Huang et al.
(2012), earnings management is inversely correlated to CEO age. Kouaib and Jarboui (2016)
reported that the elongated CEO tenures contribute to the elevated REM in the innovation
firms in Europe.

Theory and hypothesis development

Agency theory describes the relationship between a principal (shareholders) and an agent
(CEO) whereby the former delegates the authority of decision making in a firm to the latter
( Jensen and Meckling, 1976). Agency problems usually arise when the two parties have
asymmetric information and disparate interests, giving rise to the CEOs pursuing self-
interest at the expense of shareholders. According to Jensen (1993), in corporations where
the CEOs hold the position of chairman of the board, the board is more difficult to perform
its critical function (oversee the CEO hiring, firing, evaluating and compensating process)
and response timely to the failure in its CEOs.
On the other hand, stewardship theory posits that CEOs are a good steward of the
corporate assets rather than an opportunist (Donaldson and Davis, 1991). The CEOs holding
the chair position will utilize their leadership to beneficially allocate resources and avoid
activities that deteriorate future performance. However, this current research primarily
focuses on the agency theory in the belief that CEO entrenchment through sales
manipulative activities is critical in Thailand where corporate governance is weak. The
CEO-chairman dual role often leads to a situation in which the agenda and content of board
meeting accommodate the implementation of the strategies (Berg and Smith, 1978). For
example, the dual CEOs might pursue the strategies of sales price, discount or credit terms
 to manipulate sales revenues at the expense of future cash flows without intervention by the Real earnings
board. In essence, this current research hypothesizes the following: management
H1. CEO duality increases REM through sales activities. in Thailand
Given the primary concern of how the CEO performance will be judged and rewarded, the
new CEOs are tempted to embrace corporate policies that transmit positive signals to the
labor market (Fama, 1980; Holmström, 1999). In other words, unlike outgoing CEOs whose
interests revolve around explicit incentives, the incoming CEOs are motivated by implicit
93
incentives, e.g. reputation and security. Fiordelisi and Ricci (2014) concluded that in the
corporations’ situation with control-oriented culture, the firms’ low performance accelerates
CEO turnover. Thus, the new CEOs likely engage in short-term sales manipulative
strategies, in light of the fact that the practices are infrequently scrutinized by regulators
and auditors. This current research hypothesizes the following:
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H2. CEO-serviced early years in office ( first three years) increase REM through sales
activities.
Firms likely appoint a single new leader to the CEO and chairman title, if the firms’
situations and contingencies create the need for changing (Davidson III et al., 2008). For
example, when the prior CEOs have been fired (Borokhovich et al., 1996), or the firm
performance has been continuously poor (Kesner and Sebora, 1994), the firms necessitate to
signal the labor market that the new leader who has the completed authority will address
the problems. Thus, the unambiguous leader, i.e. new CEO who also serves as a chair, likely
contributes to engage in sales activity manipulation to make changes and reduce
organizational stress. In essence, this current research tests the following hypotheses:
H3. CEO duality and serviced early years in office jointly increase REM through sales
activity manipulation.

Research methodology
Sample selection and data
The sample was listed firms in the SET during 2001–2015. Data about the CEOs and board chair
were manually gleaned from the annual reports, and the financial data were retrieved from the
SETSMART. The initial sample, excluding rehabilitation firms, was 6,796 (100.0 percent)
firm-year observations. Given different financial reporting requirements and accounting rules,
717 (10.5 percent) firm-year observations belonging to the financial industry (i.e. banking, finance
and securities and insurance sectors) were excluded. Another 828 (12.2 percent) firm-year
observations without the names of CEO and chairman were excluded, and 1,395 (20.5 percent)
were subtracted from the sample set due to incomplete financial data. An additional
31 (0.5 percent) firm-year observations with unusual data (i.e. the outliers, high leverages and
influences) were removed. The final sample was 3,825 (56.3 percent) firm-year observations.

Dependent variable
Sales activity manipulation includes the acceleration of sales timing through increased price
discounts and/or more relaxed credit terms in order to pull the future revenues into the
recognition of the current period. Future earnings are thus sacrificed and overall cash inflows
are reduced as customers often anticipate similar future sales activities (Gunny, 2010).
According to Roychowdhury (2006), REM based on operational activities encompasses sales,
discretionary expenditures and production manipulation. Nevertheless, this current research
deliberately focuses on sales activity manipulation (sales-driven REM) for the following reasons.
First, downward discretionary expenditures strategies, e.g. cuts in advertising, R&D or
selling, general and administrative (SG&A), expense drive up both earnings and operating
 APJBA cash flows. However, upward sales manipulation and overproduction strategies are
11,1 detrimental to firms’ cash flows despite the improved earnings (Kothari et al., 2016). Second,
according to Järvinen and Myllymäki (2016), REM through overproduction is more
applicable to manufacturing firms with inventories. This current research nonetheless
investigates listed firms in both manufacturing and services sectors. Third, Lovata et al.
(2016) documented that sales manipulation strategy is associated with CEO tenures while
94 overproduction or SG&A expenses reduction is related to other CEO characteristics, e.g.
gender, compensation and ownership.
Normal levels of cash flows from operation are a linear function of current sales, changes
in current sales and the error terms, as expressed as (Roychowdhury, 2006):
     
CFOt 1 St DS t
¼ a0 þa1 þb1 þb2 þet ; (1)
At
1 At
1 At
1 At
1
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where CFOt is the cash flows from operating activity in year t, At−1 is the total assets at the
beginning of year t, St and ΔSt are the level of and change in the net sales in year t.
In this research, the sales-driven REM measure is abnormal operating cash flows as a
result of unusual sales volumes, calculated by actual cash flows from operations minus
normal/expected cash flows from operations derived from Equation (1). A negative
(positive) value of abnormal operating cash flows indicates upward (downward) earnings
management through sales manipulation. This research uses absolute values of abnormal
operating cash flows (ABOCF) as the proxy for REM such that the greater the ABOCF the
greater likelihood the sales manipulation.

Independent variables
In this research, there are two independent (dummy) variables: CEO duality (DUAL) and
CEO-serviced early years (EARLY). DUAL denotes the concurrent holding of the CEO and
board chair position and the subsequent consolidation of power (Hermalin and Weisbach,
1998). The variable is coded 1 for CEO duality and 0 otherwise. EARLY denotes the CEO-
serviced early years (i.e. the first three years in office) (Ali and Zhang, 2015). EARLY is
coded 1 if the CEO is in office three years or less and 0 otherwise.

Model and control variables

This research uses the following models of REM through sales activity manipulation to test
the three hypotheses.
Model (1) (H1):
ABOCFi;t ¼ a0 þa1 DUALi;t þa2 FSIZEi;t þ a3 ROAi;t þa4 MTBi;t þa5 LEVi;t
þYear fixed effect þIndustry fixed effect þei;t :
Model (2) (H2):
ABOCFi;t ¼ a0 þa1 EARLYi;t þ a2 FSIZEi;t þa3 ROAi;t þa4 MTBi;t þa5 LEVi;t
þYear fixed effect þIndustry fixed effect þei;t :
Model (3) (H3):
ABOCFi;t ¼ a0 þa1 DUALi;t þa2 EARLYi;t þa3 DUAL  EARLYi;t þa4 FSIZEi;t
þa5 ROAi;t þa6 MTBi;t þa7 LEVi;t þYear fixed effect
þIndustry fixed effect þei;t ;
 where ABOCFi,t is the absolute value of abnormal operating cash flows of firm i and year t, Real earnings
DUALi,t is coded 1 for firm i in year t if its CEO also serves as the board chairman and 0 management
otherwise, EARLYi,t is coded 1 for firm i and year t if its CEO is in office three years or less in Thailand
and 0 otherwise.
To capture the impact of firm characteristics on sales activity manipulation, this research
incorporates the four firm-specific control variables: firm size, financial performance, growth
opportunity and leverage (Kouaib and Jarboui, 2016; Järvinen and Myllymäki, 2016; 95
Luo et al., 2017; Lee et al., 2006) into the models.
Firm size (FSIZEi,t), measured by natural logarithm of total assets of firm i at the end of
fiscal year t, influences REM. According to Watts and Zimmerman (1986), profitable large
firms are constantly under pressures to meet analysts’ higher earnings forecast, while small
firms with less agency costs desire high earnings to avoid reporting losses (Kouaib and
Jarboui, 2016). Thus, sales-driven REM likely increases or decreases with the firm size.
Financial performance (ROAi,t), measured by the ratio of net income before interest and
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tax to the average of last and current year’s total assets, indicates the amount of managed
earnings because market responses to reported earnings are more sensitive for firms
with good financial performance such that the better the financial performance, the
greater likelihood of earnings management to maintain the firms’ good financial records
(Lee et al., 2006).
Growth opportunities (MTBi,t), measured by the ratio of firm i’ s stock price to its book
value per share at the end of fiscal year t, normally encourage sales activity manipulation
since the market pays special attention to growth firms and penalizes if they miss earnings
thresholds. Thus, growth firms are inclined to maintain the market’s perception on
continued growth through activity manipulation (Roychowdhury, 2006).
Leverage (LEVi,t), measured by the total debt to total asset ratio of firm i at the end of
fiscal year t, shifts future earnings to the current reporting period to secure funding and
avoid debt covenant violation (Watts and Zimmerman, 1986). Nevertheless, high leveraged
firms face higher bankruptcy risks and hence tend to avert activity manipulation that
deteriorates future cash flows. Hence, sales-driven REM might increase or decrease with the
firm leverage.
“Year fixed effect” comprising of 14 dummy variables is used to control for differences in
sales activity manipulation over the 15 sample years. Year 2015 is set as the based year.
The dummy variables are coded one if firm i is in year 2014, 2013, 2012, 2011, 2010, 2009,
2008, 2007, 2006, 2005, 2004, 2003, 2002 and 2001, and zero otherwise. “Industry fixed effect”
measured by the dummy variables is used to control for differences in business innovation
and risk involving with hug R&D spending (Kouaib and Jarboui, 2016). The three dummy
variables are coded one if firm i is categorized by the SET into the automotive sector, the
property and construction industry and the resource industry, and zero otherwise.
All variable measures are described in Table I.

Analysis findings
Descriptive results
Table II tabulates descriptive statistics, in which Panel A presents the descriptive analysis
of the sampled firms with upward (residual o0) and downward (residual ⩾ 0) sales
manipulation. The 1,923 and 1,903 firm-year observations engaged in the upward and
downward activity manipulation, respectively, suggesting that the number of the upward
and downward manipulative firms is near asymmetrical during the study periods.
The average abnormal operation cash flows for upward and downward manipulation
groups are −0.116 (SD ¼ 0.145) and 0.159 (SD ¼ 0.214), respectively. Figure 1 illustrates the
dispersion of the sampled firms along with the abnormal operating cash flow values which
are in a range from −3.36 to 3.47.
 APJBA Variables
11,1
Dependent variable
1. Real earnings management
through sales activities
Independent variables
96 1. CEO/chairman duality
2. CEO-serviced early years
Control variables
1. Firm size
2. Financial performance
3. Growth
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Notation Measurement
ABOCF Absolute value of abnormal operating cash flows
DUAL 1 ¼ dual role; 0 ¼ otherwise
EARLY 1 ¼ the first three years of new CEOs in the office; 0 ¼ otherwise
FSIZE The natural logarithm of total assets at the end of fiscal year
ROA A ratio of net income before interest and tax to the average of last
and current year’s total assets
MTB A ratio of stock prices to book values per share at the end of
fiscal year

4. Leverage LEV A ratio of total debts to total assets at the end of fiscal year
Table I. 5. Year fixed effects 1 ¼ the years of 2001–2014; 0 ¼ otherwise
Measurement 6. Industry fixed effects 1 ¼ the automotive sector, the property and construction
of variables industry, and the resource industry; 0 ¼ otherwise

In Panel B of Table II, the mean and median of ABOCF (dependent variable) are 0.139 and
0.095, respectively, comparable to Kim et al. (2017) for the multi-country setting. For the
independent variables, the mean of DUAL (22.6 percent) indicates that 22.6 percent
of the sampled firms adopted the CEO-chairman dual structure. The mean of EARLY
(28.6 percent) suggests that 28.6 percent of the CEOs of the sampled firms recently joined the
organization (⩽ 3 years), comparable to Ali and Zhang (2015) for the US samples.
For control variables, the average of FSIZE is 15.322, suggesting that the sampled firms’
total assets are roughly 4.5bn baht. The mean and median of ROA are identical at almost
0.07, showing that the sampled firms on average generated net incomes before interest and
tax on the order of seven percent from total assets. The 1.831 of MTB mean reveals that on
average, the share price of SET-listed firms is nearly double to their book value per share.
In other words, Thai stocks are just overpriced unlike in the US setting that the extant
literature reported overvaluation of stock price (e.g. the work of Chiu et al. (2013) shown on
average 3.346 of market-to-book ratio). The average LEV of 0.166 manifests that on average
the sampled firms finance about 16.6 percent of their total assets with debts.
In the Pearson matrix analysis, there are the statistically significant correlations among
the variables. For example, the correlation between ABOCF and DUAL is significantly
positive (coe. ¼ 0.059, p o0.01), suggesting the positive association between sales activity
manipulation and CEO duality. ABOCF is also positively correlated to ROA (coe. ¼ 0.036,
p o0.05) and MTB (coe. ¼ 0.057, p o0.01), indicating the positive effects of sales activity
manipulation on financial performance and growth opportunities; and negatively correlated
to FSIZE (coe. ¼ −0.052, p o0.01), suggesting the negative association between sales
activity manipulation and firm size. In addition, the variance inflation factors (VIFs) of the
predictors (Untabulated results) are below 1.77, indicating that no multicollinearity exists
between the independent variables.

Regression results
Table III tabulates the OLS regression analysis for the association between sales activity
manipulation and CEO duality and the CEO-serviced early years. In the table, the regression
coefficient for DUAL (0.034) is positive and significantly associated with ABOCF ( po0.01),
suggesting that CEO duality leads to sales activity manipulation and thus supporting H1.
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Panel A: the number of firm-year observations with upward and downward sales manipulation
Upward manipulation (Residual o0) Downward manipulation (Residual ⩾0)
Total n % Mean SD n % Mean SD
Abnormal operation cash flows 3,825 1,923 50.27 −0.116 0.145 1,902 49.73 0.159 0.214
Panel B: descriptive and Pearson correlation coefficient analysis
Variables Mean SD Q1 Median Q3 1 2 3 4 5 6
1. ABOCF 0.139 0.222 0.043 0.095 0.170
2. DUAL 0.226 0.418 0.000 0.000 0.000 0.059***
3. EARLY 0.286 0.452 0.000 0.000 1.000 0.025 −0.070***
4. FSIZE 15.322 1.602 14.188 15.012 16.156 −0.052*** −0.045*** −0.004
5. ROA 0.069 9.462 0.027 0.065 0.109 0.036** 0.020 −0.040** 0.047***
6. MTB 1.831 2.583 0.740 1.220 2.150 0.057*** 0.032** 0.023 0.064*** 0.211***
7. LEV 0.166 0.211 0.000 0.068 0.293 −0.017 −0.034** 0.031* 0.353*** −0.043*** 0.041**
Notes: n ¼ 3,825 for all variables. Refer to Table I for the variable definitions. *,**,***Significant at 0.10, 0.05 and 0.01 levels (two-tailed), respectively
Real earnings

97
management
in Thailand

Table II.
Descriptive statistics
 APJBA 800

11,1

Firm-year observations
600

400
98
200
Figure 1.
Dispersion of the
sampled firms along
with the abnormal 0
–4 –2 0 2 4
operating cash flows
Abnormal operating cash flows
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Coefficients (t-values)
Independent variables Predicted sign H1 H2 H3

Intercept ? 0.196 (4.98***) 0.208 (5.31***) 0.193 (4.91***)

DUAL + 0.034 (3.98***) 0.013 (1.29)
EARLY + 0.008 (1.03) −0.008 (−0.88)
DUAL× EARLY + 0.093 (4.64***)
FSIZE +/– −0.006 (−2.56***) −0.007 (−2.77***) −0.006 (−2.44**)
ROA + 0.000 (0.92) 0.000 (1.05) 0.000 (1.03)
MTB + 0.004 (3.06***) 0.004 (3.13***) 0.004 (2.88***)
LEV +/− −0.000 (−0.67) −0.000 (−0.72) −0.000 (−0.67)
Year fixed effect Yes Yes Yes
Industry fixed effect Yes Yes Yes
Adjusted R2 0.177 0.139 0.232
Table III. F-values 3.88 3.25 4.50
Main OLS regression n 3,825 3,825 3,825
analysis of sales Notes: Refer to Table I for the variable definitions. **,***Significant at 0.05 and 0.01 levels
activity manipulation (two-tailed), respectively

The coefficient for EARLY is insignificant, suggesting that the CEO-serviced early years do
not affect sales activity manipulation and thus not supporting H2.
The regression coefficient for DUAL×EARLY (0.093) is positive and significantly
associated with ABOCF ( p o 0.01), supporting H3. The interaction-term results indicate
that the dual leadership role and the CEO recency influence the decision to engage in sales
activity manipulation. In other words, the new CEOs do not manipulate sales activities in
order to display the managerial potential, except for the new CEOs who concurrently
serve as chairman. The firms’ the board appoints the new CEOs with the dual chair title
when the board needs make the firms change and reduce the organizational stress (e.g. the
predecessor CEO is fired or has unfavorable performance). The power and career
concerns of the new CEOs could affect changes in sales strategies in order to achieve the
earnings targets.
For the firm-specific control variables in the regression of the H3 test, the coefficient for
FSIZE (−0.006) is inversely correlated to sales activity manipulation ( po0.05), suggesting
that larger firms less engage in sales manipulation. The coefficient for MTB (0.004) is
positively correlated to sales activity manipulation ( p o0.01), indicating that firms with
 high growth opportunities are inclined to engage in REM through sales. The coefficients for Real earnings
ROA and LEV are insignificant, concluding no associations between financial performance, management
leverage and sales manipulation. in Thailand
For controlling the year fixed effects, the untabulated results show that the coefficients
for the dummy variables of year 2001, 2002, 2003, 2004 and 2010 are positive and
statistically significant, suggesting that sales activities of these five years were more
manipulated than those of the 2015 based year. Thai listed firms might necessitate the 99
financial recovery after the periods of the 2008 Global financial crisis and the 1997 Asian
financial crisis by adjusting the sales activity strategies. Moreover, the untabulated results
of the industry fixed effects reveal the statistically significant and positive (negative)
coefficients for the dummy variables of the property and construction industry, and the
resource industry (the automotive sector). This implies high sales activity manipulation in
the industries of the property and construction, and the resource and low sales activity
manipulation in the automotive sector, compared to those of other sectors/industries.
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Additional and sensitivity analysis

Upward and downward sales activity manipulation. To deal with how the dual and/or new
CEOs manage sales-driven earnings, additional analysis divides the sample into upward
and downward sales-driven REM groups. Table IV tabulates the OLS regression analysis of
the upward and downward sales activity manipulation with regard to CEO duality and/or
CEO-serviced early years in office. Panel A of Table IV compares the effects of DUAL on
upward and downward sales activity manipulation. The coefficients for DUAL (0.038 and
0.033 for downward and upward manipulation, respectively) are significant and positively
associated with ABOCF ( p o0.01) in both directions, indicating that CEO duality induces
REM in a manner of increased or decreased sales activities. For the control variables, the
coefficients for FSIZE (−0.011) and MTB (0.010) are significantly correlated to sales activity
manipulation ( p o0.01) only in the downward direction. Thus, larger firms less likely
engage in downward sales manipulation while high growth firms exhibit a propensity for
downward sales manipulation.
Panel B of Table IV compares the effects of EARLY on upward and downward sales
activity manipulation. The coefficient for EARLY (0.031) is significant and positively
associated with ABOCF ( po0.01) only in the upward direction, suggesting that during the
first three years in office the newly appointed CEOs have a propensity to engage in activities
to drive up sales. As for the downward direction, the coefficient for EARLY is statistically
insignificant. The new CEOs typically concerning about their executive reputation need to
create the impression of improved performance through sales revenue management.
Especially, in the control-oriented business culture, such as Thailand, corporate performance
is significantly associated with the CEOs’ job security (Fiordelisi and Ricci, 2014). According
to Graham et al. (2005), executives’ career survival hinges on meeting the earnings target.
Panel C of Table IV presents the interaction effects of DUAL and EARLY on sales activity
manipulation, the coefficients for DUAL×EARLY (0.075 and 0.096 for downward and upward
manipulation, respectively) are significant and positively associated with ABOCF ( po0.01) in
both directions, suggesting that the newly appointed CEOs who also serve as board chairman
tend to manipulate sales revenue in both directions. Unlike the new CEOs without a board
chair title, the new CEOs serving a chairman are essential to make the increased earnings
impression as they have the monopoly of power and control. Therefore, to signal the labor
market that the new CEOs with a board chair title can address the problems and make the
firms change, therefore they might reduce sales revenues for a specific purpose. According to
Badertscher et al. (2009), firms engage in downward earnings management to normalize lower
taxable incomes with lower book incomes (book-tax conformity) and, thus, generate current
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11,1

100

Table IV.
APJBA

Upward and
downward sales
activity manipulation
Coefficients (t-values)
Panel A: the individual effect of the Panel B: the individual effect of the Panel C: the joint effect of the dual and
dual CEOs early CEOs early CEOs
Independent variables Downward Upward Downward Upward Downward Upward

Intercept 0.255 (4.81***) 0.125 (2.16**) 0.266 (5.01***) 0.136 (2.36**) 0.258 (4.87***) 0.109 (1.88*)
DUAL 0.038 (3.18***) 0.033 (2.71***) 0.020 (1.48) 0.012 (0.86)
EARLY −0.004 (−0.36) 0.031 (2.69***) −0.015 (−1.28) 0.013 (0.97)
DUAL×EARLY 0.075 (2.69***) 0.096 (3.45***)
FSIZE −0.011 (−3.22***) −0.003 (−0.74) −0.011 (−3.29***) −0.003 (−0.98) −0.011 (−3.18***) −0.002 (−0.56)
ROA 0.000 (0.22) −0.000 (−0.62) 0.000 (0.36) −0.000 (−0.46) 0.000 (0.30) −0.000 (−0.49)
MTB 0.010 (4.82***) −0.000 (−0.10) 0.011 (5.08***) −0.000 (−0.26) 0.010 (4.70***) −0.000 (−0.30)
LEV −0.000 (−1.65) 0.000 (1.16) −0.000 (−1.73*) 0.000 (1.13) −0.000 (−1.73*) 0.000 (1.24)
Year fixed effect Yes Yes Yes Yes Yes Yes
Industry fixed effect Yes Yes Yes Yes Yes Yes
2
Adjusted R 0.582 0.213 0.531 0.213 0.608 0.307
F-values 5.89 2.75 5.45 2.74 5.73 3.34
n 1,902 1,923 1,902 1,923 1,902 1,923
Notes: Refer to Table I for the variable definitions. *,**,***Significant at 0.10, 0.05 and 0.01 levels (two-tailed), respectively
 tax savings. Furthermore, tax-motivated downward earnings management through real Real earnings
activity management less likely leads to accounting irregularities. management
in Thailand
Random effects
This study also employs random effect model to test the main hypotheses. The rationale
behind the random effect model is that the variation across firm-year observations might be
random and uncorrelated with independent variables in the models. Panel A of Table V 101
reports the OLS regressions with the random effect estimates. The coefficient for DUAL
(0.029) is positive and significantly associated with ABOCF ( p o0.01). The coefficient for
EARLY is insignificant. The coefficient for DUAL×EARLY (0.091) is positive and
significantly associated with ABOCF ( p o0.01). These findings thus are consistent with the
main results that sales activity manipulation increases with CEO duality and the new CEO
concurrently serving as board chair. The Hausman (1978) test was used to examine which
model is more appropriate by comparing difference in the estimates between a random and
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fixed effect model. The tests ( p o0.05) reject the null hypothesis of the random effect model
in favor of the fixed effect model, thus unexplained year-to-year variations exist.

Accrual-based earnings management

One concern of using sales activity manipulation to capture earnings management is that
increases in sales revenues might due to genuine efforts of the new and/or dual CEOs. This
study performs sensitivity analysis by using accrual-based manipulation as a dependent
variable. Discretionary accruals are the difference between firms’ actual and normal
accruals. The modified Jones (1991) model is utilized to estimate the normal level of accruals
cross-sectionally for industry-years as follows:
     
Accrualst 1 DS t PPEt
¼ a0 þa1 þa2 þa3 þet ;
At
1 At
1 At
1 At
1
where Accrualst is the earnings before extraordinary items and discontinued operations
minus the cash flows from operating activity in year t, ΔSt is the change in revenues from the
preceding year t, PPEt is the gross property, plant and equipment in year t, and At−1 is the
total assets at the beginning of year t. The absolute value of residuals from the modified Jones
regression capturing discretionary accruals is a proxy for accrual-based earnings
management (AEM). In Panel B of Table V, the coefficients for DUAL (coe. ¼ 0.006,
po0.10), EARLY (coe. ¼ 0.009, po0.01) and DUAL×EARLY (coe. ¼ 0.016, po0.10) are
positive and statistically significant. The results indicate that CEOs with chairman title and/or
the first three years in office engage in accrual manipulation. Although, real efforts of the new/
dual CEOs could cause abnormal revenues, it cannot deny that those CEOs are aimless to
manage earnings. According to Zang (2012), real activity manipulation dealing with changes
in transaction execution takes place during the fiscal year; however, accrual management
focusing on changes in transaction presentation could be done after the fiscal year-end.

Endogeneity concern
The relationship between sales-driven REM and CEO duality/serviced early years in office
could reflects some unmeasured firm attribute, such as business or organizational
environment. Based on the main findings of Table III, sales-driven REM is associated with
firms’ size and growth. Firms with business pressures possibly have a high likelihood of
dual leadership structure and/or new CEO appointment, and engage in sales manipulation.
This study employs the 2SLS regression models and the instrumental variables, i.e. market
concentration ratio (MCR: market share of industry) and meeting/beating of analyst
earnings forecast (MBEPS: difference between actual and consensus analyst forecasted
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11,1

102

Table V.
APJBA

and accruals-based
earnings management
Random effects model
Coefficients (t-values)
Panel A: random effects Panel B: discretionary accruals
Independent variables (1) (2) (3) (1) (2) (3)

Intercept 0.236 (6.57***) 0.243 (6.77***) 0.234 (6.49***) 0.079 (4.76***) 0.078 (4.73***) 0.076 (4.56***)
DUAL 0.029 (3.38***) 0.008 (0.81) 0.006 (1.71*) 0.003 (0.55)
EARLY 0.012 (1.52) −0.004 (−0.43) 0.009 (2.67***) 0.006 (1.68*)
DUAL* EARLY 0.091 (4.57***) 0.016 (1.86*)
FSIZE −0.008 (−3.18***) −0.008 (−3.29***) −0.007 (−3.08**) −0.001 (−0.88) −0.001 (−0.92) −0.001 (−0.80)
ROA 0.001 (1.59) 0.001 (1.70*) 0.001 (1.73*) −0.000 (−2.68***) −0.000 (−2.50**) −0.000 (−2.55**)
MTB 0.004 (3.18***) 0.005 (3.24***) 0.004 (2.97***) 0.001 (1.75*) 0.001 (1.71*) 0.001 (1.64)
LEV 0.000 (0.20) 0.000 (0.08) 0.000 (0.18) −0.000 (−4.29***) −0.000 (−4.39***) −0.000 (−4.36***)
Year fixed effects – – – Yes Yes Yes
Industry fixed effects – – – Yes Yes Yes
Hausman’s test for random/fixed effects 0.032 0.040 0.042 – – –
2
R 0.099 0.076 0.161 0.256 0.269 0.286
2
F-value/(Wald χ ) (38.29) (29.08) (62.51) 3.99 4.20 4.12
n 3,825 3,825 3,825 3,669 3,669 3,669
Notes: Refer to Table I for the variable definitions. *,**,***Significant at 0.10, 0.05 and 0.01 levels (two-tailed), respectively
 earnings per share scaled by stock price), following prior research (Harrison et al., 1988; Real earnings
Eriksson et al., 2001; Lee et al., 2012; Zhang, 2018; Chen and Hsu, 2018). In Table VI, the management
Wu-Hausman test indicates that DUAL is endogenous ( p o0.01), but EARLY is not in Thailand
( p W0.10, untabulated results). In addition, the Sargan statistic which is insignificant
( p W0.1) suggests the validity of the instruments. In the first stage, a logistic model which
the binary dependent variable, DUAL, is regressed on MCR, MBEPS, FSIZE, ROA, MTB,
LEV, Year and Industry, is utilized to estimate the probability of CEO duality. In the second 103
stage, the study uses the fitted probabilities, DUALF, in place of DUAL in H1 and H3
models. The second stage results are in agreement with the OLS findings, hence,
endogeneity does not pose a serious problem to the sample.

Manufacturing companies
Extent literature argues that manufacturing companies could engage in REM through
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overproduction of inventory to reduce fixed costs per unit ( Järvinen and Myllymäki, 2016).
The study classifies the sampled firms into manufacturing (2,904 observations) and non-
manufacturing groups (921 observations). Untabulated results are consistent with those of
the main tests for the manufacturing group. In non-manufacturing companies, the
individual effects of CEO duality and serviced early years on sales-driven REM disappear,
but their joint effects leads to the sales manipulation. In other words, non-manufacturing
firms manage sales activities if the CEOs serve as chairman and service during the first
three years in office.

Conclusion
This study examines the individual and interaction effects of CEO duality and CEO-serviced
early years on REM through sales activities for the sample of Thai listed firms from 2000 to 2015.

Coefficients (t-values)
First stage Second stage
CEO duality Sales-driven REM
Independent variables (1) (2)

Intercept 0.260 (2.14**) 0.068 (1.47) 0.065 (1.24)

MCR −0.458 (−4.52***) – –
MBEPS 0.008 (1.70*) – –
DUALF – 0.181 (2.64***) 0.253 (2.17**)
EARLY – – 0.027 (1.20)
DUALF× EARLY – – 0.218 (1.86*)
FSIZE −0.005 (−0.74) −0.001 (−0.42) −0.001 (−0.57)
ROA 0.001 (0.87) 0.000 (0.64) 0.000 (0.62)
MTB 0.010 (1.75*) 0.007 (3.67***) 0.006 (2.98***)
LEV −0.002 (−3.35***) 0.000 (0.61) 0.000 (0.46)
Year fixed effects Yes Yes Yes
Industry fixed effects Yes Yes Yes
Wu-Hausman’s test for endogeneity – 0.006 –
Sargan’s test for instrument validity – 0.571 –
R2 0.371 0.189 0.252
F-value/(Wald χ ) 2
4.88 (75.22) (66.00)
n 1,260 1,260 1,260
Table VI.
Notes: MCR is market concentration ratio, MBEPS is difference between actual earnings per share and A two-stage
forecasted earnings per share by consensus analysts, DUALF is fitted value of CEO duality from the regression model of
first-stage logistic regression model, and the remain variables referred to Table I for the variable definitions. sales activity
*,**,***Significant at 0.10, 0.05 and 0.01 levels (two-tailed), respectively manipulation
 APJBA In the main test, the research finds that CEO duality leads to sales activity manipulation, whereas
11,1 CEO recency ( first three years in office) does not affect sales manipulation. Moreover, the joint
effect of the CEO duality and recency influences the decision to manage sales activities.
Additional test reveals that CEO duality firms are more inclined to engage in either upward or
downward sales activity manipulation, and the newly appointed CEOs tend to adopt only the
upward sales strategy during their first three years in office. The new CEOs who also serve as
104 board chair manage sales revenue through either upward or downward manipulative strategies.
A large battery of sensitivity test indicates that the main results are robust to use the random
effect estimates and the 2SLS regression, replace sales-driven REM with discretionary accrual
manipulation, and control for manufacturing business. The research findings thus lend support
to the agency theory such that firms’ earnings and future cash flows, particularly in emerging
economies including Thailand, are susceptible to exploitation by CEOs, especially in firms with
CEO duality and/or newly appointed CEOs.
The results of this study have implications for various stakeholders including regulatory
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bodies to encourage the firms in the separated leadership structure. When the dual structure
presents, this research suggests regulators to introduce the necessary checks and balance for
agency conflicts, such as usage of the external strategic shareholder mechanism which could
control the power of the dual CEO and mitigate agency problems (Chahine and Tohme, 2009).
The results would give a view to external auditors in assessing the material misstatement risks
to new CEOs, and financial statement users in observing the firms’ the financial report quality
more closely. According to the FASB’s and IASB’s new converged standard on revenue
recognition (IFRS 15 revenue from contracts with customer)[1], it requires CEOs to use
additional judgement in measuring the performance obligations and timing of satisfaction on
the obligations, therefore firms might have earlier revenue recognition (Rutledge et al., 2016).

Note
1. Thailand locally adopts IFRS by default and often outdated versions of IFRS are used. For
example, Thai Financial Reporting Standard (TFRS) No. 15: revenue from contracts with
customers is implemented by January 1, 2019.

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About the author

Sirada Nuanpradit is Accounting Lecturer at the Department of Accountancy, Faculty of Economics and
Business Administration, Thaksin University, Songkhla, Thailand. She received PhD Degree in
Accountancy from Chulalongkorn University, Bangkok, Thailand. Her research interests include areas of
financial accounting and capital market. Sirada Nuanpradit can be contacted at: sirada_cu@hotmail.com

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