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Market Rewards Associated with Patterns of Increasing Earnings
Abstract
This paper examines the association between patterns of increasing earnings and incremental firm value as reflected by earnings multiples, holding level of income constant. As predicted, we find firms exhibiting patterns of increasing earnings have larger earnings multiples than other firms and the incremental earnings multiple is reduced significantly when an increasing earnings pattern is broken. The findings are robust to controlling for growth, risk, earnings variability, measurement error in permanent earnings, persistence, dividend yield, and industry membership, using proxies identified in previous research. An extension of the Lang [1991] model indicates increasing earnings patterns can affect firm valuation by permitting market participants to update their prior beliefs about the firm. We conclude earnings patterns are a proxy for value-relevant firm characteristics such as growth that are not reflected fully in proxies identified in prior research.
... (Bartov, 1993 (DeAngelo et al., 1996;Barth et al., 1999;Bartov et al., 2002;Kasznik and McNichols, 2002;Lopez and Rees, 2001;Skinner and Sloan, 2002;Matsunaga and Park, 2011). 1) Kahneman and Tversky(1979) (Bernard and Skinner, 1996;Guay et al., 1996). ...
... 이는 경영자가 보험수리적 가정을 재량적으로 추정한다 하더라도 외부에서 이를 인지하기 어려움을 암시한다 (Brown, 2004 (Picconi, 2006;Hann et al., 2007;Kang, 2010 어렵다 (Scholes and Wolfson, 1992;Godwin et al., 1996;Bergstresser et al., 2006;An et al., 2014). 퇴직급여와 관련된 복잡한 정보를 정확히 이해하는 일은 일반투자자들 뿐만 아니라 전문지식을 갖춘 투자분석가들에게 조차도 어려운 것으로 알려진다 (Coronado and Sharpe, 2003;Franzoni and Marin, 2006;Picconi, 2006 (Schipper, 1989;Scholes and Wolfson, 1992;Godwin et al., 1996;Bergstresser et al., 2006;An et al., 2014 Thomas(1988), Ghicas(1990), Thomas and Tung(1992) Barth et al., 1999;Bartov et al., 2002;Kasznik and McNichols, 2002;Lopez and Rees, 2001;Skinner and Sloan, 2002 (Hayn, 1995;Barth et al., 1999;Bergstresser et al., 2006;Asthana, 2008 등 (Velicer and Fava, 1998). ...
... 이는 경영자가 보험수리적 가정을 재량적으로 추정한다 하더라도 외부에서 이를 인지하기 어려움을 암시한다 (Brown, 2004 (Picconi, 2006;Hann et al., 2007;Kang, 2010 어렵다 (Scholes and Wolfson, 1992;Godwin et al., 1996;Bergstresser et al., 2006;An et al., 2014). 퇴직급여와 관련된 복잡한 정보를 정확히 이해하는 일은 일반투자자들 뿐만 아니라 전문지식을 갖춘 투자분석가들에게 조차도 어려운 것으로 알려진다 (Coronado and Sharpe, 2003;Franzoni and Marin, 2006;Picconi, 2006 (Schipper, 1989;Scholes and Wolfson, 1992;Godwin et al., 1996;Bergstresser et al., 2006;An et al., 2014 Thomas(1988), Ghicas(1990), Thomas and Tung(1992) Barth et al., 1999;Bartov et al., 2002;Kasznik and McNichols, 2002;Lopez and Rees, 2001;Skinner and Sloan, 2002 (Hayn, 1995;Barth et al., 1999;Bergstresser et al., 2006;Asthana, 2008 등 (Velicer and Fava, 1998). ...
This study examines whether managers are likely to exercise discretion in determining pension plan actuarial assumptions to meet or exceed earnings targets. According to current accounting standards, managers can exercise broad discretion in setting actuarial assumptions under a defined benefit (DB) pension plan. Existing literature documents that managers can manage earnings upward by manipulating pension plan assumptions. Based on sample firms with DB pension plans from 2011 to 2018, our results reveal the followings. First, managers tend to manipulate pension assumptions optimistically when the unmanaged earnings miss the targets. Second, investors do not recognize the effect of changing assumptions on reported earnings and thus react favorably to the overstated earnings. Third, manipulating firms under-perform in the long run compared to the control group despite favorable short-term performance, which suggests accrual reversal and managerial attribute effects.
... They indicate that when a firm faces a level of earnings volatility, the possibility of bankruptcy will be greater and thus increase its borrowing cost. Also, it is found that managers smooth earnings to maximize share price (Barth et al. 1999), lower the firm's expected tax liability (Smith and Stulz 1985), reduce income taxes (Graham and Rogers 1999), mitigate the information asymmetry between managers and shareholders (DeMarzo and Duffie 1995), and communicate their private information about future earnings (e.g., Tucker and Zarowin 2005;Sankar and Subramanyam 2001). ...
... Collectively, the results of regression analysis lend credence to the idea that the traditional costly contracting incentives (namely, managerial ownership and political costs) provide little explanation for discretionary accruals choices, while income smoothing activity explains great of the cross-sectional variation in managerial choices in all estimation periods. Firms probably benefit from damping the fluctuation of earnings (Beidleman 1973) because the smoothed earnings may lead to higher share prices (Barth et al. 1999) and lower cost of equity (Francis et al. 2004), as they could be seen as a reflection of management abilities. ...
... Anecdotal academic evidence suggests that managers' emphasis on maintaining steady earnings increases and avoiding reporting losses (e.g., Hayn 1995;Burgstahler and Dichev 1997;Degeorge et al. 1999;Nelson et al. 2002). It found that there are abnormally high (low) frequencies of firms that are above (below) the earnings benchmark (Burgstahler and Dichev 1997;Degeorge et al. 1999 Barth et al. (1999) find that the capital market reacts positively to firms that succeed in maintaining a long series of earnings increases. In particular, they point out that those firms achieve higher price-to-earnings multiplies and that premium is reduced significantly when that pattern of earnings increases is broken. ...
The main purpose of this study is to provide further insights into the potential influence of a number of internal and external governance mechanisms in constraining earnings management and determining the agency costs level. In addition, this study attempts to enhance the understanding of a number of issues relating to ownership structure and corporate governance in an emerging country setting. The international corporate collapse and accounting scandals surrounding some prominent large companies (e.g. Enron, Xerox, World.com, HealthSouth, Tyco, Waste management, RiteAid and Subeam) raised concern about the effectiveness of different monitoring devices that protect investors’ interests. The majority of failures have resulted, in part, from accounting manipulation and dereliction of efficient corporate governance mechanisms that control the opportunistic behaviour of management. This study argues that agency conflicts within a firm are considered to be among the influential sources of earnings management activities. In emerging countries with highly concentrated ownership, the prevalence of agency conflicts is more likely to lie mainly between controlling and minority shareholders rather than between managers and outside shareholders. Such conflicts, combined with the weak legal protection of minority shareholders and the flexibility inherent in accounting choices, are likely to induce managers to manipulate the reported earnings and adopt a range of activities that might be contrary to minority stockholders’ interests. Using an original data set for a sample of Egyptian listed firms, the findings of the empirical analyses are in agreement with this argument. It is shown that corporate governance mechanisms do not work in isolation, but they interact to effectively curb earnings management and alleviate different agency conflicts. It is also shown that firm-specific characteristics (e.g., growth opportunities) play a crucial role in understanding the conditional role of such mechanisms and other governance mechanisms, such as dividends and short debt, may help resolve corporate agency problems.
... In this table, we provide additional robustness checks of our main findings. In columns (1)-(2), we use the indicator of increasing earnings patterns for at least five years (INC_NI) (Barth et al. 1999) and the discretionary accruals based on Dechow et al. (1995) (Accr_MJ) as two alternative measures of income smoothing. To ensure that our measures of income smoothing are calculated using data after the ruling, in columns (3)-(4) we repeat the baseline regression with an extended sample between 1995 and 2007. ...
... We perform further robustness checks and present the results in Table 9. First, in columns (1)-(2), we use the indicator of increasing earnings patterns for at least five years (INC_NI) (Barth et al. 1999) and the discretionary accruals based on the Dechow et al. (1995) (Accr_MJ) as two alternative dependent variables. 14 Second, one can argue that our measures of income smoothing based on a rolling five-year window may make it is less likely that the observed changes in income smoothing can be attributed to the ruling. ...
This paper investigates whether and how shareholder litigation infuences income smoothing. Using the ruling of the Ninth Circuit Court of Appeals in 1999 as an exogenous shock to the threat of litigation, we fnd that the increasing difculty of class action lawsuits decreases income smoothing. This fnding is robust to diferent model specifcations. We also show that such an efect is stronger for frms that are more likely to face greater pressure from the threat of shareholder litigation risk. Overall, our fndings extend the literature on investigating how class action lawsuits can afect the motivation of income smoothing.
... In this table, we provide additional robustness checks of our main findings. In columns (1)-(2), we use the indicator of increasing earnings patterns for at least five years (INC_NI) (Barth et al. 1999) and the discretionary accruals based on Dechow et al. (1995) (Accr_MJ) as two alternative measures of income smoothing. To ensure that our measures of income smoothing are calculated using data after the ruling, in columns (3)-(4) we repeat the baseline regression with an extended sample between 1995 and 2007. ...
... We perform further robustness checks and present the results in Table 9. First, in columns (1)-(2), we use the indicator of increasing earnings patterns for at least five years (INC_NI) (Barth et al. 1999) and the discretionary accruals based on the Dechow et al. (1995) (Accr_MJ) as two alternative dependent variables. 14 Second, one can argue that our measures of income smoothing based on a rolling five-year window may make it is less likely that the observed changes in income smoothing can be attributed to the ruling. ...
This paper investigates whether and how shareholder litigation influences income smoothing. Using the ruling of the Ninth Circuit Court of Appeals in 1999 as an exogenous shock to the threat of litigation, we find that the increasing difficulty of class action lawsuits decreases income smoothing. This finding is robust to different model specifications. We also show that such an effect is stronger for firms that are more likely to face greater pressure from the threat of shareholder litigation risk. Overall, our findings extend the literature on investigating how class action lawsuits can affect the motivation of income smoothing.
... However, discretionary accruals are most often handled by managers in a way contrary to the original intent of enhancing value relevance. For example, selfinterested managers may selectively define and disclose accounting measures through the use of discretionary accruals to fulfil performance benchmarks such as external debt contract requirements (DeAngelo et al., 1994) and earnings targets in management remuneration packages (Balsam, 1998;Shuto, 2007), thereby using market expectations to enhance firm value (Barth et al., 1999;DeAngelo et al., 1996). ...
... Extensive research finds associations between the fulfilment of earnings expectations and the market valuation of firms. According to Barth et al. (1999) and DeAngelo et al. (1996), positive firm valuation implication is associated with the meeting of external targets. This association is further confirmed by Bartov et al. (2002), who find evidence of a valuation premium in meeting analysts' current earnings expectations in sample data between 1983 and 1997, irrespective of whether meeting earnings expectations is genuine or deliberately orchestrated. ...
... Following [66], this variable captures any disparity in EM between mandatory and voluntary adopters before the mandatory IFRS adoption date in KSA. Furthermore, we examine MTBV as there is a motivation to disclose earnings that grow with firms' growth prospects [67,68]. We anticipate finding a positive relationship with MTBV. ...
This paper aims to examine the impact of corporate sustainable management (CSM) on earnings management (EM) activities using annual data from 2018 to 2022 for 37 non-financial Saudi indexed firms. A multi-measure approach was utilized to proxy for EM (AEM and REM) and CSM (CSR sustainability reporting, CSR sustainability committee, CSR sustainability external audit, GRI report guidelines, ESG performance index). The empirical analysis employed pooled ordinary least squares (POLS) regression. The results suggest that CSM plays a significant role in reducing both AEM and REM practices, indicating that sustainability-oriented organizations mitigate EM activities. Furthermore, the study reveals a negative correlation between CSM and sales manipulation, overproduction, and cutting discretionary expenditures. This research supports the notion that companies prioritize sustainable management due to a focus on long-term strategies and transparency. This is the first work in the Middle East and Arab region, particularly in Saudi Arabia, investigating this association.
... This smoothing is particularly attractive for managers whose continuing job tenures depend on reported profits. Researchers also reveal that the market ranks profitable companies more highly (Barth et al., 1999) and, moreover, companies achieve unusually strong stock market performance when they report positive earnings. ...
Purpose
This paper explores the relationship between earnings management and firms' value through the moderating effect of the missing elements – corporate social responsibility (CSR) disclosure and state ownership in Russian companies. The main argument of the paper is that CSR disclosure can be used as a mitigating mechanism to weaken the negative relationship between earnings manipulation and market value. Additionally test whether state ownership is an important moderating factor in this relationship are conducted as state has always played an important role in the emerging Russian market.
Design/methodology/approach
The hypotheses are tested on panel data for 223 publicly listed Russian firms for the period 2012–2018. A number of robustness tests are used to check the obtained results for consistency. Following previous research GMM method is employed to address endogeneity concerns.
Findings
Supported by stakeholder theory, it is observed that firms that disclosed more CSR information experience a weaker negative relationship between earnings management and market value because investors and other stakeholders positively evaluate a positive CSR image. This negative effect of earnings management on market value is even weaker for state-owned companies as market participants appreciate involvement of state-owned companies in CSR activities and place greater expectations on these firms to be responsible without clear understanding whether these actions are “window dressing” for this type of companies or not.
Originality/value
The study results provide new insights into the relation between earnings management, firm's value, CSR disclosure and state ownership in emerging-market firms. The paper highlight the importance of considering country-specific factors, such as state ownership, while analysing the market reaction on CSR disclosure and earnings management since the institutional peculiarities may help to explain differences in the obtained results.
... Earnings management is the embellishment of financial statements by the management of the company using its discretion in preparing financial statements. Summarizing the previous studies, the motivations for corporate earnings management can be divided into three categories: one is to avoid errors in earnings forecasts (Kasznik and McNichols, 2002), and the other is to smooth corporate earnings and reduce volatility (Barth et al., 1999), and the third is to modify the operating loss of the enterprise (Brown, 1997). Cerullo and Cerullo (2000) even pointed out that after enterprises introduced ERP one after another in 1990, the activity of earnings management is still popular. ...
Enterprise Resource Planning (ERP) system utilization and Environmental, Governance, Social (ESG) practice incorporation have jointly wielded significant influence on various aspects of accounting operations. On the other side, leveraging the robust information infrastructure, Taiwanese firms have widely implemented ERP systems and have been aligning with international ESG initiatives in recent years. The objective of this study is to investigate the impact of ERP utilization and ESG practices on real and accrual earnings management among firms listed in Taiwan over an 19-year span from 2003 to 2021. The results of this study suggest duration of ERP implementation has a negative impact on accruals earnings management, but has a positively influence on real management. The results underscore the significant influence of ERP utilization duration on the different aspects of corporate earnings management activity. Additionally, our investigation illustrates a negative association between the corporate assimilation of ESG practices and both real and accrual earnings management. This reveals that enterprises committed to implementing ESG practices highlight long-term substantive operations over the short term periodic performance of financial statements.
... Thomas и Zhang откриват, че изглаждането на доходите се свързва с по-високи коефициенти цена ˗ доходност, което е положително свързано с прогнозите за растеж и отрицателно ˗ с риска 39 . Следователно, мениджмънтът се опитва да изглади фирмените доходи, с цел да удовлетвори търсенето от страна 37 Carlson, S.J., C.T. Bathala. Ownership Differences and Firms' Income Smoothing Behavior. ...
This book is devoted to a poorly developed topic in Bulgaria, related to the ability of corporate management to change the accounting of basic corporate results over several consecutive years in order to achieve a certain uniformity in the distribution, use and presentation of incomes. The topic is important for corporate practice, auditors, corporate counterparts, and company valuers (shareholders). In the book, theoretical and practical statements and positions related to the practice of smoothing the corporate income and its varied consequences, especially on the informativeness and stock prices, is systematized. Both the positive and the negative effects of income smoothing are analyzed. The problem is mainly related to the possibilities of designing the company's activity which is a factor in forming the behavior of investors. In this study are defined categories, absent from the Bulgarian financial practice, as accruals, informativeness and information uncertainty of income. In the book is analyzed the theoretical fundamentals of income smoothing and is outputted own definition for this process. On the basis of the theoretical relationships between income smoothing (use of discretionary accruals) and their informativeness is defined four research hypotheses. Their empirical verification is done in Chapter three. It is proved that the main motive for income smoothing of Bulgarian companies is opportunistic and is provided mechanisms for corporate governance that prevent the concealment of the actual financial position of the company and opportunism to minority shareholders.
... 339), it is the reversal of accrual error, ε t , that gives rise to a negative serial correlation in ψ t . 4 Turning next to the estimation of persistence, the literature uses reported earnings to estimate the AR(1) coefficient in Eq. 1 (Dechow and Dichev 2002;Barth et al. 1999;Francis et al. 2004). Using Eq. 1 and noting that ψ t = ε t t+1 − ε t−1 t , we get ...
This study provides a theoretical framework to help isolate persistence estimates of earnings innovations from the effects of accounting measurements. We show that estimates of persistence are biased downward when using reported earnings because of the presence of accrual estimation errors. The greater the errors, the greater the downward bias, which explains the empirically observed positive association between accrual quality and estimated earnings persistence. However, when we debias reported earnings persistence as guided by our theoretical framework, we fail to detect any such association and find that the debiased persistence measure better captures fundamental persistence as evidenced by its incremental association with market returns.
... Previous studies find that firms that meet or beat earnings benchmarks for several consecutive periods enjoy abnormally high market valuations but suffer from substantial declines in value once such streaks end. Therefore, firms with ongoing experience of meeting or beating previous year's earnings have greater incentives to use earnings management to avoid missing the relevant benchmark (e.g., Barth, Elliott, and Finn 1999). To account for these incentives, we include a dummy variable, HBEAT, that takes the value of 1 for firms that have only reported earnings increases for at least five consecutive years, and 0 otherwise. ...
We examine whether the design of a firm’s internal management accounting system is associated with GAAP earnings management. We exploit the fact that ASC 280 mandates a “management approach” requiring multisegment firms to disclose their segment earnings as defined internally by their management accounting system. We posit that the less these segment earnings are decoupled from GAAP earnings, the higher are the costs of earnings management because earnings management spills over to segment earnings and distorts information used for internal decision-making. Thus, we predict that firms with more decoupled segment earnings engage in more earnings management. Using a large sample of U.S. firms from 1998 to 2020, we find support for this prediction. We also find that the decision usefulness of segment earnings for segment investment purposes decreases as earnings management increases, with this association being more pronounced for firms with less decoupled segment earnings measures.
Data Availability: Data are available from the public sources cited in the text.
JEL Classifications: M41; G14.
... The study found that the relationship between stock returns and earnings is not linear. The research findings indicated certain circumstances, such as financial health (Barth et al., 1999) and business profitability, which cause the BV of equity to be a more relevant component than earnings or vice versa. ...
This research aims to investigate the value relevance of accounting information (VRAI) and the effect that earnings management (EM) has on the VRAI. Research on the VRAI is generally carried out using the model introduced by Ohlson (1995). Problems will occur when the VRAI as a company performance measurement tool is faced with the practice of manipulation by managers. This study’s population is all manufacturing companies listed on the LQ45 Index. Sampling-based on purposive sampling; the research sample obtained as many as 16 samples over three years, so the number of observations is 48 companies per year. The data analysis technique used multiple linear regressions with moderating variables or moderated regression analysis (MRA). The results show that earnings per share (EPS) have value relevance (VR), and book value (BV) has VR. Operating cash flow (OCF) has no VR. Management weakens the VR of earnings, EM is not moderating BV relevance, and EM strengthens the VR of OCF.
... Firms with good financial performance will tend to maintain or improve their performance in the next period through better accounting practices (Huynh & Nguyen, 2019). To maintain the value of earnings per share (which is expected to increase), managers manage the earnings (Barth et al., 1999). This behavior causes higher financial performance and controls. ...
... Firms with good financial performance will tend to maintain or improve their performance in the next period through better accounting practices (Huynh & Nguyen, 2019). To maintain the value of earnings per share (which is expected to increase), managers manage the earnings (Barth et al., 1999). This behavior causes higher financial performance and controls. ...
Intellectual capital is widely recognized as one of the most important assets in modern businesses, but it is only reported in the financial statement in certain conditions. This study aims to evaluate the role of value-added intellectual capital (VAIC) in moderating the relationship between earnings management and financial performance. This research uses data from non-financial companies listed on the Singapore Exchange and Indonesia Stock Exchange covering the period of 2016-2021, with a total of 3,303 firm-year observations. VAIC is measured using Pulic's intellectual capital model and earnings management using the Kasznik Model (1999). This study uses multiple linear regressions to examine the relationship between variables. The findings indicate that earnings management has no significant effect on the financial performance of Singapore, but it has a significant positive effect on the financial performance of Indonesia. Furthermore, this study discovers that intellectual capital moderates the relationship between earnings management and financial performance in both countries differently, that intellectual capital moderation is positive (negative) for the Singapore (Indonesia) sample. These findings suggest that the role of intellectual capital varies depending on stock exchanges; Singapore is considered a developed country in Southeast Asia, whilst Indonesia is considered a developing one. This study concludes that the role of intellectual capital in the relationship between earnings management and financial performance varies between market characteristics and across industries.
... Tolak ukur yang digunakan oleh pemegang saham untuk menilai kinerja dan posisi keuangan suatu perusahaan ialah basis penghasilan dan laba (Tang, at al 2016). Perusahaan yang memiliki kenaikan laba secara terus menerus, sahamnya akan bernilai premium dan sebaliknya Barth (1999aBarth ( , 1999b. Schipper (1989) mengemukakan bahwa manajemen laba merupakan campur tangan manajemen dengan suatu maksud yang dilakukan secara sengaja. ...
The quality of financial reports is important in the sustainability of a company, quality reports can increase public trust in the company. But often this is misinterpreted by the management by doing various ways to make financial statements look good in the eyes of investors, this is what is called earnings management. During the Covid-19 pandemic that hit the world, of course, there are various challenges to be able to present quality financial reports, this is what researchers are interested in conducting an analysis of the quality of financial reports, especially the banking industry in Indonesia. There are various ways to detect whether there are earnings management actions in the company, one of which is using the M-Score Beneish Model. From the results of the study, it was found that only 18% of the banking industry management carried out earnings management actions
... As investment decisions cannot be based only on the current amount of earnings, such as earnings in year t, investors use data on a series of earnings over a longer period, better known as "permanent earnings" (Pimentel & Lima, 2010). When it comes to the relationship between accounting results, investors' decisions and stock prices, the results of some studies show that companies that manage to maintain the previously achieved level of the reported result are "rewarded" by investors, and therefore have a higher P / E ratio (Barth et al., 1999). On the other hand, companies that are unable to meet investors' expectations in terms of accounting earnings result in lower share prices. ...
In the professional literature, the largest number of studies focus on examining and analyzing the content of auditors’ reports and their impact on the quality of financial statements, while a smaller number of authors examine the impact of audit opinions on earnings persistence. Since understanding the type of audit opinion undoubtedly allows investors to assess the quality of a company’s earnings and predict future cash flows, this paper investigates whether they react differently when making capital in- vestment decisions if the financial statements contain a modified opinion. By looking at the previous literature, the authors consider market reactions, especially when it comes to some kind of modified opinion, given that they can cause a negative reaction and affect the reduction of earnings persistence. The research results so far show, although inconsistent and unusual, still interesting results when it comes to the impact of the audit opinion on earnings persistence. By analyzing previous studies, the authors reveal whether investors give enough importance to the audit opinion when making financial and investment decisions, which could later affect the amount of additional capital, which is a necessary condition for development, especially in transition and developing countries. In addition to the conclusions of this paper being relevant for users of financial statements, especially investors, they are also significant for regulatory bodies, as they indicate the necessity of constant improvement of the accounting and auditing system.
... Similarly, Antoniou et al. (2008 also find higher deal premiums for firms in the UK between 1986 and 2004, so higher deal premiums also provide an incentive to manage earnings. Moreover, researchers Barth et al. (1999), Xie (2001), Bartov et al. (2002), Skinner andSloan (2002), Pincus et al. (2007) study the market reward for meeting or beating analysts' expectations and provide evidence that the target firms can artificially increase their share prices to get higher gains. In short, the wealth benefits for the target firms give rise to a financial incentive to manipulate earnings prior to the takeover. ...
... With respect to the estimated coefficient related to the market to book ratio, growth opportunities are positively and significantly related to REM. This result, suggesting that REM should be more prevalent among firms with higher growth opportunities, is consistent with Barth et al. (1999) and Xue (2003), who show that EM can be used for signalling purposes. This finding denotes that French firms are more interested in capital markets because they have been using IAS/IFRS since 2005. ...
... With respect to the estimated coefficient related to the market to book ratio, growth opportunities are positively and significantly related to REM. This result, suggesting that REM should be more prevalent among firms with higher growth opportunities, is consistent with Barth et al. (1999) and Xue (2003), who show that EM can be used for signalling purposes. This finding denotes that French firms are more interested in capital markets because they have been using IAS/IFRS since 2005. ...
This research evaluates the earnings conference calls’ tone in firms that meet or just beat the earnings benchmarks (Just Meet-Beat Firms). In particular, it examines the relationship between firms that meet or just beat the earnings benchmarks and managers’ tone disclosed during the earnings conference call. It also examines whether there are significant differences between managers and audience tone in the call of Just Meet-Beat Firms. All non-financial firms considered in the FTSE 350 list for the period from 2010 to 2015 are taken in the sample. The results report that managers in Just Meet-Beat Firms disclose more positive tone during the earnings conference call than other firms. The results also show that there are significant differences between managers and audience tone in earnings conference calls of Just Meet-Beat Firms and the managerial tone has a higher value of mean than the audience tone in earnings conference calls of Just Meet-Beat Firms. This research is beneficial for market participants. For example, it alerts external users to be more cautious about the manger’s tone provided in the earnings conference call for Just Meet-Beat Firms. However, the external users need to consider carefully the audience tone in the call, since it reflects the truth about managers’ performance.
Purpose
Prior research on meeting or beating earnings thresholds documents that firms with earnings momentum are awarded with valuation premiums. However, it is unclear from this strand of literature why this is the case. Therefore, this study aims to investigate the effects of time-varying earnings persistence on earnings momentum and their pricing effects.
Design/methodology/approach
This study exploits a firm that reports earnings momentum as research setting to examine whether earnings persistence is significantly higher for firms with consecutive earnings increases. In addition, it investigates a relation between earnings momentum and fundamentals-driven earnings persistence and estimates return associations of earnings momentum conditional on economic-based persistence of earnings.
Findings
The empirical evidence suggests that firms with earnings momentum reflect higher time-varying earnings persistence. It further reveals that longer duration of earnings momentum is associated with higher fundamentals-driven earnings persistence. More importantly, valuation premiums are exclusively assigned to earnings momentum determined by strong firm fundamentals, not momentum itself.
Originality/value
This study provides new empirical evidence that valuation premiums accrued to firms with earnings momentum are conditional on time-varying earnings persistence. The research implications are relevant to investors, regulators and auditors, as the results bring conclusions that earnings momentum reflects successful business models not poor accounting quality. This leads to a more complete view of earnings momentum and helps allocate resources when evaluating earnings-momentum firms.
Purpose
This study aims to examine whether Chinese firms increase their concerns about analysts’ earnings forecasts following the split-share structure reform (SSR) in 2005, which removed trading restrictions on approximately 70% of the shares of listed firms.
Design/methodology/approach
Using data from 2002 to 2019, the authors empirically test the association between meeting or beating analysts’ earnings expectations and the implementation of SSR.
Findings
The authors find that firms are more inclined to meet analysts’ earnings expectations after the introduction of SSR. Further analysis shows that firms guide analysts to walk their forecasts down by manipulating third-quarter earnings, suggesting enhanced value relevance between analysts’ forecasts and third-quarter earnings management in the postreform period.
Practical implications
The findings reveal an undesirable side effect of SSR and suggest that policymakers and regulators should consider and carefully manage the complex relationships between firms and analysts.
Originality/value
In contrast to prior studies that predominantly focus on the positive effects of the reform, this study reveals the side effects of SSR and provides new evidence on the mechanisms of meeting or beating analysts’ earnings expectations.
The literature provides conflicting arguments and mixed results regarding whether capital markets punish managerial myopia. Using managers cutting research and development (R&D) investments to meet short-term earnings goals as a research setting, this study reveals that capital markets penalize managerial myopia, especially for firms with high investor sophistication. Moreover, the negative market reactions to managerial myopia are weaker for firms with overinvestment problems than for those without such problems. Overall, the results support the notion that security markets are not shortsighted. In further analysis, we document that compensation, especially earnings-based compensation, may cause managers to behave myopically. Our study contributes to the literature, reconciling previously mixed findings by capturing managers’ myopic behavior in a more targeted way and showing that markets punish myopic R&D cutting.
We examine whether and how the time-oriented tendency embedded in languages influences income smoothing. Separating languages into weak- versus strong-future time reference (FTR) groups, we find that firms in weak-FTR countries tend to smooth earnings more. We also find that relationships with major stakeholders (i.e., debtholders, suppliers, and employees) amplify the effect of the FTR of languages on income smoothing. Additional analyses suggest that income smoothing driven by the FTR of languages enhances earnings informativeness. These findings provide new insights on the role that language plays in financial reporting decisions and on how relationships with major stakeholders influence the relation between an important feature of language and corporate income smoothing behavior.
This paper was accepted by Brian Bushee, accounting.
Funding: L. A. Myers acknowledges financial support from the University of Tennessee [the Haslam Chair of Business and the Haslam Family Faculty Research Fellowship].
Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2021.01753 .
Purpose – This study aims to investigate whether accounting-related litigation is associated with a break in the client’s earnings string and the auditor’s response to a break in the earnings string.
Design/methodology/approach – The authors use regression models on a sample of publicly-traded USA companies with earnings strings.
Findings – The authors find that clients’ earnings string breaks are associated with increased accounting litigation risk and audit fees. The results are more prevalent for larger breaks.
Research limitations/implications – The findings suggest auditors anticipate string breaks by clients which implies that audit fee research should consider earnings string characteristics in the fee models.
Practical implications – The auditor’s access to private information allows them to anticipate string breaks and potential increase in litigation risk.
Originality/value – An earnings string break represents a convergence of concerns highly relevant to the auditor: more users relying on the financial statements with greater expectations, increased likelihood of losses to those users, an environment where the likelihood of misstatement may increase, and explicitly stated
professional responsibilities in response to the latter. Despite that, and a rich earnings string literature, prior studies have not directly examined auditors’ response to a client’s string break.
This paper examines whether owner-managers of small firms use their compensation strategically to change reported earnings. We identify an institutional setting, Denmark, in which the owner-manager has the discretion to shift compensation from salary to dividends and hence increase reported earnings at almost no direct cost due to approximate tax neutrality between the two income streams. Three findings emerge. First, owner-managers are twice as likely to decrease their salary when doing so can result in meeting or beating the zero earnings benchmark. Second, those decreasing their salaries to beat the benchmark are 45% more likely to increase dividends simultaneously than those who can beat the benchmark but do not. This indicates that reporting incentives shape compensation shifting. Third, owner-managed firms enjoy about 6% (EUR 1070) lower interest rates (interest expenses), than firms reporting losses, when they beat the benchmark by simultaneously decreasing salaries and increasing dividends. Our results highlight that owner-managers can manage reported earnings by altering their own compensation, which has economic consequences for the firm. This has implications for users of owner-managed firms’ financial reports because reported earnings would seem a poor contracting signal for these firms.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Purpose
This study examines whether country-level financial integration affects firms' accounting choices and the quality of financial information.
Design/methodology/approach
This study employs Propensity Score Matching (PSM), and panel regressions of a large sample of data from 20 emerging markets over the period 1987–2018.
Findings
This study finds evidence that increased level of financial integration is significantly positively associated with firms' accruals earnings management (AEM) and real earnings management (REM).
Research limitations/implications
Findings in the study have implications for standard-setting bodies that aim to enhance the usefulness of financial reporting quality. The study also has implications for various initiatives by governments in emerging markets aimed at raising investor confidence and fostering stock market development through greater financial integration.
Practical implications
Findings in the study have implications for standard-setting bodies that aim to enhance the usefulness and quality of financial reporting. The findings can be of interest to analysts, auditors and other monitoring institutions who play a crucial role in detecting earnings management and reducing information asymmetry. Finally, the study has implications for various initiatives by governments in emerging markets aimed at raising investor confidence and fostering stock market development through greater financial integration.
Originality/value
Findings in the study reveal how country-level financial integration affects accruals and real earnings management in a sample of firms from 20 emerging markets. Further, the study adds to the growing body of literature on emerging markets where capital markets mechanisms, regulatory environment and firm's corporate governance are distinct to developed markets.
We develop and empirically validate dynamic approaches of implied cost of equity capital (ICC), facilitating the estimation of firms’ expected cost of equity capital at any required estimation date. Using on average 246,090 monthly observations, we empirically validate conflicting approaches for dynamic ICC estimation by analyzing the inferred market risk premia and assessing correlations with common risk factors. While the adjustments suggested by Daske et al. (2006) yield important and systematic deviations in the course of the year, the dynamic residual income model of Kempkes and Wömpener (2019) is robust to the choice of the estimation period.
Purpose
The purpose of this study is to investigate the prevalence of earnings management in the Australian not-for-profit (NFP) disability service providers sector, as well as to understand the motivations for and implications of such practices. This research is important for stakeholders, such as members and funders, as well as the broader Australian community, considering the significant financial resources allocated to these organizations from the public purse.
Design/methodology/approach
The authors employ a longitudinal dataset containing financial data from 154 Australian NFP disability service providers, collected over a two-year period (2015–2016). Through the analysis of detailed balance sheets and income statements, the authors seek to uncover evidence of earnings management practices in this sector. The study’s results provide valuable insights into the behaviour of the charitable human services sector.
Findings
The findings reveal that Australian NFP disability service providers engage in earnings management practices, primarily aimed at reducing reported profits to meet the normative financial expectations of stakeholders, such as public sector funders and philanthropists. The executives of these organizations strive to report profits close to zero, being cautious not to report a loss, which might raise concerns about their sustainability.
Originality/value
The authors contribute to the existing literature on earnings management in the NFP sector by focussing on Australian disability service providers, an area that has been under-researched due to a lack of suitable data. The results offer insights into the incentives and implications of earnings management practices in this sector and highlight the need for a revaluation of accounting standards, reporting requirements and audit arrangements applicable to the NFP sector.
Stock pride change associated with a given unexpected earnings change (the earnings response coefficient) exhibits cross-sectional and temporal variation. We predict and document evidence that the earnings response coefficient is a function of riskless interest rates and the riskiness, growth and/or persistence of earnings. The earnings response coefficient also varies cross-sectionally with the holding period return interval. Collectively, our results explain the previously reported differential earnings response coefficient with respect to size. Moreover, by including the factors noted above, the empirical specification of the earnings/returns relation is significantly improved.
Studies examining managerial accounting decisions postulate that executives rewarded by earnings-based bonuses select accounting procedures that increase their compensation. The empirical results of these studies are conflicting. This paper analyzes the format of typical bonus contracts, providing a more complete characterization of their accounting incentive effects than earlier studies. The test results suggest that (1) accrual policies of managers are related to income-reporting incentives of their bonus contracts, and (2) changes in accounting procedures by managers are associated with adoption or modification of their bonus plan.
This study hypothesizes that because shareholders have a liquidation option, losses are not expected to perpetuate. They are thus less informative than profits about the firm's future prospects. The results are consistent with the hypothesis. They also show that the documented increase in the earnings response coefficent as the cumulation period increases appears to be due exclusively to the effect of losses. The liquidation option effect extends to profitable cases where earnings are low enough to make the option attractive. Alternating explanations for the low informativeness of losses such as mean reversal of earnings are not supported by the tests.
This study designs and implements new tests of the information contained in accounting earnings. The authors examine whether the magnitude of the effect of unexpected earnings on stock returns is (positively) correlated with the presen t value of revisions in expected future earnings derived from a univa riate time-series model. By addressing the valuation implications of the time-series properties of earnings, they uncover a new dimension to the information content of earnings and, in the process, find no e vidence that the reactions of stock returns to unexpected earnings ar e excessively volatile. Copyright 1987 by the University of Chicago.
This paper examines whether market participants implicitly assign different coefficients to pension cost components when determining security prices. The major findings are: (1) The pension cost components' coefficients generally differ from one another. As predicted, the transition asset amortization coefficient is lower than other pension coefficients, and is insignificantly different from zero. (2) Consistent with the market viewing pension-related income streams as less risky, the pension coefficients are generally larger than the nonpension coefficients. Additional specification tests permitting nonpension coefficients to vary with risk, tax-payer status, and industry membership, generally support the basic findings, although the significance levels are generally higher.