EARNINGS MANAGEMENT: A CASE OF NEW ZEALAND LISTED PROPERTY TRUSTS

Existing literature of earnings management focuses on a wide range of firms and large corporations. However, LPTs are usually limited in the use of accruals for earnings management because of the characteristics of real estate investment. This paper examines earnings management strategies among New Zealand LPTs by using itemized contributing elements of total cash flow incorporating fundamental direct property data, such as average lease term and vacancy rates. Using White's heteroscedastic-correction estimate, the model specification using total cash flow rather than itemized elements revealed significant results for average lease term and accruals playing little role in future earnings. When itemized elements of total cash flow were analyzed, fundamental property variables were not significant, with contributory elements of total cash flow providing the best estimator of earnings next period. These findings suggest that New Zealand LPTs use different earnings management strategies than the literature dealing with a wide variety of firms would suggest. Additionally, this paper reveals that when contributory elements of cash flow are available to investors, that indicators of fundamental underlying direct property performance is of limited benefit for estimating earnings.