How Business Strategy Shapes Earnings Management Practices

This study examines how firms’ strategic orientations influence their earnings management practices. To address this issue, the analysis integrates established strategy typologies with multiple measures of earnings manipulation. To mitigate endogeneity concerns, the study adopts a lagged-variable design and employs dynamic panel estimation using the system Generalized Method of Moments (system GMM). The results indicate that prospector firms exhibit the strongest propensity to engage in real-activity earnings management, followed by defender firms, whereas analyzer firms display the lowest propensity. Moreover, the analysis reveals a U-shaped relationship between strategic-orientation scores and the extent of real-activity earnings management, offering a novel perspective that challenges the conventional assumption of a linear or monotonic association. These findings suggest that firms with more explicit or strongly articulated strategic orientations—whether focused on innovation or operational efficiency—face heightened incentives to manipulate earnings. The evidence implies that auditors should exercise greater scrutiny of such firms in practice