Gaming the Float: How Managers Respond to EPS-based Incentives

Table 8: Changes in Shares and Accounting and Real Earnings Management
This table presents results from a difference-in-difference analysis examining the association between increases in
shares outstanding and measures of accounting and real earnings management. We distinguish firms that significantly
increase the number of shares outstanding in quarter t from those that do not. We define a significant increase as
any change that results in a 25% increase or greater (a split factor of 5-for-4 or greater). Then we compare how
changes in the usage of earnings management tools differs across samples. Discretionary accruals are residuals from
industry total accruals regressions including performance controls following Ecker et al. (2011). Total accruals are
defined as the change in current assets, adjusted for the change in cash, minus the change in current liabilities,
adjusted for current liabilities used for financing, minus depreciation expense. Measures of real earnings management
are estimated by abnormal cash flow (RealEM CF ), production costs (RealEM P rod ), and expenditure (RealEM CF )
following the methodology in Roychowdhury (2006). In Panel A report the average of the absolute value of these
variables over quarter t − 1 (the ‘pre’ period) and compare it to that over quarter t + 1 (post). We distinguish firms
that increased shares at t = 0 from those that did not, and report the difference across these two groups in the
differences across time. Panel B uses the firm average over the 4 quarters prior to t = 0 and compares this to the
firm average over the t + 1 to t + 4. t-statistics on the differences across samples are clustered at the firm-level.
Panel A: 1 quarter pre and post evaluation period
split? pre post dif
|Accruals T otal | N 3.09% 3.10% 0.01%
Y 3.76% 3.30% -0.46%
-0.47% (-7.07)
|Accruals Disc | N 6.66% 6.67% 0.01%
Y 7.38% 6.59% -0.79%
-0.80% (-4.21)
|RealEM CF | N 2.83% 2.83% 0.01%
Y 3.31% 3.03% -0.28%
-0.29% (-5.50)
|RealEM P rod | N 3.62% 3.63% 0.01%
Y 4.31% 3.96% -0.34%
-0.35% (-6.31)
|RealEM Exp | N 3.43% 3.45% 0.02%
Y 3.84% 3.40% -0.43%
-0.45% (-8.62)
Panel B: 4 quarter pre and post evaluation period
split? pre post dif
|Accruals T otal | N 2.97% 2.88% -0.09%
Y 3.49% 3.17% -0.32%
-0.23% (-3.98)
|Accruals Disc | N 6.14% 6.34% 0.20%
Y 6.65% 6.23% -0.42%
-0.62% (-4.88)
|RealEM CF | N 2.67% 2.63% -0.05%
Y 3.18% 2.89% -0.29%
-0.24% (-6.63)
|RealEM P rod | N 3.52% 3.43% -0.09%
Y 4.21% 3.87% -0.34%
-0.25% (-4.19)
|RealEM Exp | N 3.30% 3.29% -0.01%
Y 3.79% 3.35% -0.44%
-0.43% (-8.86)
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