Abstract

The purpose of this study is to examine whether listed firms in Taiwan use discretionary accruals and the financial instruments regulated under Statement of Financial Accounting Standards No.34 as complement tools in reporting earnings. A set of simultaneous equations are adopted to capture managers' incentives to enhance earnings performance through financial instruments usage and accrual management. The empirical results of two-stage least squares regressions revealed that, as conjectured, the financial instruments usage is positive associated with the magnitude of discretionary accruals and support the complement hypothesis. It suggests that managers jointly use financial instruments and discretionary accruals to increase earnings and, besides the risk hedging purpose, provides alternative explanation for the multi-goals of financial instruments usage. These results remained robust to various specification tests.

Key words: Earnings management, financial instruments usage, discretionary accruals, complement hypothesis.