Abstract
The documented prevalence of real activity manipulation (RAM) over the last decade emphasizes the importance of its economic consequences (Graham et al. 2005, Cohen et al. 2008, Chi et al. 2011, Courteau et al. 2015). This study investigates the impact of RAM on subsequent operating performance in terms of return on assets (ROA) and cash flow from operating activities (CFO) across life cycle stages, which may vary due to the different costs and benefits of RAM across life cycle stages. Using the life cycle proxy developed by Dickinson (2011), we find that the RAM methods of increasing sales, and cutting discretionary expenses have positive effects on subsequent ROA, especially in growth firms, and the method of reducing cost of sales by overproduction have negative effects on ROA. The methods of increasing sales and cutting discretionary costs have negative effects on subsequent CFO, again especially in growth firms, but overproduction to reduce cost of sales have positive effects on subsequent CFO. Our findings are of interest to investors, auditors, regulators, and academics with respect to financial statement analysis and earnings quality.