Interim Versus Fourth Quarters: Earnings Threshold Management Using Real Activity

This study examines the patterns of real activities management in interim- and fourth-quarter financial reporting and addresses a gap in earnings management research. Real activities management is a strategy used to meet financial benchmarks while adhering to GAAP. We find that firms reduce real activities management in the fourth quarter, and the likelihood of using income-increasing real activities management to meet earnings benchmarks is lower in the fourth quarter. Further investigations reveal that both analyst coverage and increased institutional ownership influence real activities management throughout the year. Finally, year-end audits seem to be the primary mechanism driving the difference between fourth and interim quarters in constraining real activities management. We therefore recommend that enhancing oversight of interim reporting could improve transparency throughout the fiscal year.