Purpose:The purpose of this study is to analyze the effect of managers’ incentive bonuses on both accrual and real earnings management. Design/methodology/approach:First, we investigate the relationship between managers’ bonuses and both accrual earnings management (measured by a modified Jones model) and real earnings management (measured by Roychowdhury proxies). Next, we examine whether management has any preferences for earnings management methods to enhance its bonuses. Finally, we investigate the possible effects of earnings management on future operating performance. Our sample consists of compositional data in the period from 2006 to 2012. Findings:We find a negative relationship between real earnings management and managers’ bonuses and detect that managers prefer to use accrual earnings management to earn more bonuses. The results also show that real earnings management will reduce a firm’s performance in future periods, and on the other hand that increasing managers’ bonuses links to improvement of the firm’s future performance. The results suggest that managers are typically aware of the negative effects of real earnings management on the firm’s future performance and thus prefer to improve the firm’s performance in securing their bonuses when their ability to manage accruals is constrained. Originality/value:The implications of this paper provide further evidence on how managers’ bonuses affect their discretion in using accrual and real earnings management. This finding is important to investors and regulators.

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