Download or read book Earnings Management in the Aftermath of the Zero Earnings Discontinuity Disappearance written by Naser Makarem and published by . This book was released on 2019 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: Purpose: The purpose of this paper is to investigate earnings management by firms reporting a small profit or a small loss after the recent evidence that the discontinuity around zero earnings has disappeared.Design/methodology/approach: Using a large sample of US firms for the period 2002-2011, regression analysis and earnings distribution approach are employed to examine the earnings management of small profit and small loss firms in terms of both accruals management and real activities manipulation.Findings: The results suggest that both small profit and small loss firms are engaged in upward manipulation of accruals and real activities. This implies that failure to document a difference between firms to the right and left of zero by prior studies is not due to small profit firms not managing earnings, but rather this is more attributable to loss firms engaging in upward manipulation. Furthermore, it is indicated that the discontinuity around the distribution of earnings change has also recently disappeared as firms reporting a small earnings decrease demonstrate similar earnings management behavior to those reporting a small earnings increase.Research limitations/implications: This study is subject to the measurement error which is a common limitation in the earnings management literature.Practical implications: The results suggest that the users should be aware that, in addition to firms that meet benchmarks by a slight margin, firms narrowly missing benchmarks are also involved in earnings management.Originality/value: This study shows that the disappearance of the discontinuity around zero earnings and zero change in earnings should not be interpreted as a sign of no earnings management. It also explains how earnings management could have contributed to the disappearance of the discontinuities in earnings distribution.
Download or read book Earnings Management Alternative Explanations for Observed Discontinuities in the Frequency Distribution of Earnings Earnings Changes and Analyst Forecast Errors written by Cindy Durtschi and published by . This book was released on 2005 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: The discontinuities at zero in the frequency distributions of reported net income (deflated by beginning-of-period market capitalization), deflated change in net income, I/B/E/S quot;actualquot; earnings, and analysts' forecast errors are the most widely cited evidence of earnings management. We provide evidence consistent with alternative explanations for each of these discontinuities. We show that firms reporting small losses are priced significantly differently from firms that report small profits. An effect of this difference in pricing is that earnings to the left of zero are deflated by significantly different denominators than earnings to the right of zero inducing a discontinuity in the distributions of deflated net income and deflated changes in net income at zero. We also show that sample selection criteria may contribute to the discontinuity in these distributions as well as the discontinuity in I/B/E/S actual earnings. Finally, the presumption in the literature which focuses on the discontinuity at zero in the distribution of analysts' forecasts errors is that earnings are managed to meet or beat analysts' forecasts. We provide an alternative explanation: the discontinuity is caused by the fact that analysts' forecast errors tend to be much greater when the forecasts are optimistic than when they are pessimistic. This tendency leads to more small positive forecasts errors (pessimistic forecasts) than small negative forecast errors (optimistic forecasts).
Download or read book Earnings Management written by Joshua Ronen and published by Springer Science & Business Media. This book was released on 2008-08-06 with total page 587 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book is a study of earnings management, aimed at scholars and professionals in accounting, finance, economics, and law. The authors address research questions including: Why are earnings so important that firms feel compelled to manipulate them? What set of circumstances will induce earnings management? How will the interaction among management, boards of directors, investors, employees, suppliers, customers and regulators affect earnings management? How to design empirical research addressing earnings management? What are the limitations and strengths of current empirical models?
Download or read book Earnings Management written by Joshua Ronen and published by Springer. This book was released on 2010-11-29 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book is a study of earnings management, aimed at scholars and professionals in accounting, finance, economics, and law. The authors address research questions including: Why are earnings so important that firms feel compelled to manipulate them? What set of circumstances will induce earnings management? How will the interaction among management, boards of directors, investors, employees, suppliers, customers and regulators affect earnings management? How to design empirical research addressing earnings management? What are the limitations and strengths of current empirical models?
Download or read book Loss Aversion and the Zero earnings Discontinuity written by Leonidas Enrique De la Rosa and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Earnings Management to Avoid Earnings Decreases and Losses written by David Burgstahler and published by . This book was released on 1996 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Discontinuity in Earnings Report and Managerial Incentives written by Tatiana Fedyk and published by . This book was released on 2007 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper provides a rational explanation for earnings discontinuity in the context of the agency model. A company manager often possesses private information about the project's expected return. This information is valuable to the firm because early warning that a project is unlikely to succeed allows the firm to fire the manager and to discontinue a project with an expected loss.When issuing a report, the manager can choose to engage in real earnings management and report higher-than-actual earnings for the current period, but as a result, the overall expected cash flow from the project will be undermined. The only way to extract the manager's private information is to offer him a generous severance payment as compensation for disclosing bad news. It is shown that any optimal contract induces overinvestment and earnings management.Furthermore, discontinuity in earnings reports arises endogenously under most circumstances. For a linear cost of misreporting, the paper presents the closed-form solution for the optimal contract and shows that the existence of an area of discontinuity in the earnings report depends negatively on the firm size and positively on the cost of managerial effort. These results are in line with empirical studies on discontinuity in earnings and executive severance agreements.
Download or read book Earnings Management written by Kathleen Yates and published by Nova Science Publishers. This book was released on 2016 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Earnings management is an issue that directly affects the overall integrity and quality of financial reporting and to date, many studies have been conducted in an attempt to gain an understanding of whether firms are engaging in earnings management, why they do so, what are the motives that drive managers' discretionary behaviour, what are the economic consequences and whether investors can see through this behaviour? In this book, Chapter One reviews the developments and the trends in the contemporary earnings management research and discuss several possible avenues for future research. Chapter Two provides an overview of the most recent studies on earnings management in relation to the financial crisis and the institutional environment and firm characteristics. Chapter Three provides a description of the nowadays most commonly used methods for measuring earnings management in accounting and finance literature. Chapter Four examines earnings management and corporate social responsibility as an entrenchment strategy.
Download or read book Mixture and Continuous Discontinuity Hypotheses written by Andrew Yim and published by . This book was released on 2014 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: A parsimonious model is developed to understand two perplexing, salient features of the distributions of earnings, earnings change, and earnings surprise. The model provides guidance for empirical work to uncover the unmanaged earnings important to firm valuation and public scrutiny, yet unobserved by outside parties. Simulation results based on the model show that the puzzling volcano shape of the distributions can arise from the mixture of a spiky distribution of managed earnings with a bell-shaped distribution of unmanaged earnings. The spiky distribution is due to cookie-jar earnings management that compresses unmanaged earnings from both sides toward an earnings benchmark, leading to a concentration of density around there. The mixture is due to the auditor's adjustment decision, which seems stochastic from the public's or client firm's perspective. Additional simulation results suggest that the widely documented discontinuity in the distributions can be partly due to a steep increase in density appearing like a discontinuity when a continuous distribution is plotted in terms of frequency counts in histogram bins. The main analytical results are a general characterization of the optimal earnings management strategy and the derivation of closed-form solutions for particular functional form assumptions. Potential applications include structurally estimating the model for policy analysis to assess the impact on earnings manipulation.
Download or read book Discontinuity in Earnings Reports and Managerial Incentives written by Tatiana Valerievna Fedyk and published by . This book was released on 2007 with total page 160 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Earnings Management written by Thomas E. McKee and published by Thomson South-Western. This book was released on 2005 with total page 224 pages. Available in PDF, EPUB and Kindle. Book excerpt: Learn how to legally manage your earnings with EARNINGS MANAGEMENT! This finance text demystifies earnings management and provides you with 28 reasonable and legal techniques. Read this text and you will gain valuable knowledge about earning management concepts and tools and gain insight into the management decisions that can shape financial statements and the underlying quality of the earnings.
Download or read book What Have We Learned About Earnings Management Integrating Discontinuity Evidence written by David Burgstahler and published by . This book was released on 2015 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: The accounting literature includes numerous examples of discontinuities at prominent benchmarks that are widely interpreted as evidence that earnings are managed to meet those benchmarks. However, there are also a few examples where discontinuities do not exist, which are sometimes interpreted as inconsistent with earnings management. There are also several suggested alternative explanations for discontinuities. This paper reviews and integrates the various elements of the body of discontinuity-related evidence.
Download or read book Earnings Management written by John Casey and published by . This book was released on 1996 with total page 212 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book The Impact of Increased Disclosure Requirements and the Standardization of Accounting Practices on Earnings Management Through the Reserve for Income Taxes written by Sonja O. Rego and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine whether the regulatory changes required by the Sarbanes-Oxley Act of 2002 (SOX) and Financial Accounting Standards Board Interpretation No. (FIN) 48 reduced the propensity for earnings management through the reserve for income taxes. Given prior evidence that firms use this reserve to manage earnings to beat the consensus analyst forecast, the regulatory changes implemented by both SOX and FIN 48 allow us to study the effects of accounting regulation on earnings management. We find that neither SOX nor FIN 48 reduced earnings management through the reserve for income taxes. Thus, in contrast to research that examines whether SOX affected nontax, accrual-based earnings management, our results suggest managers continue to take advantage of their discretion over the accounting for income taxes to beat the consensus analyst forecast in both the post-SOX and post-FIN 48 periods.
Download or read book An Alternative Interpretation of the Discontinuity in Earnings Distributions written by William H. Beaver and published by . This book was released on 2007 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: We show that the asymmetric effects of income taxes and special items for profit and loss firms contribute substantially to a discontinuity at zero in the distribution of earnings. Income taxes draw profit observations towards zero while negative special items pull loss observations away from zero. These earnings components are thus expected to contribute to a discontinuity even in the absence of discretion. We show our results are not an artifact of deflation, and that other common components of earnings do not have similar effects on the earnings distribution around zero.
Download or read book Short Term Earnings Guidance and Accrual Based Earnings Management written by Andrew C. Call and published by . This book was released on 2013 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: Motivated by recent practitioners' concerns that short-term earnings guidance leads to managerial myopia, we investigate the impact of short-term earnings guidance on earnings management. Using a propensity-score matched control sample, we find strong and consistent evidence that the issuance of short-term quarterly earnings guidance is associated with less, rather than more, earnings management. We also find that regular guiders exhibit less earnings management than do less regular guiders. Our findings hold using both abnormal accruals and discretionary revenues to measure earnings management, and after controlling for potential reverse causality concerns. Furthermore, in a setting where managers have particularly strong capital market incentives to manage earnings, we corroborate the above findings by documenting that earnings guidance either has no impact on or actually mitigates earnings management. Overall, our evidence does not support the criticism from practitioners that short-term earnings guidance leads to more earnings management.
Download or read book Earnings Management Chapter 11 Emergence and Firm Value written by Timothy C. G. Fisher and published by . This book was released on 2017 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the impact of earnings management prior to bankruptcy filing on the passage of firms through Chapter 11. Using data on 261 U.S. public firms, we construct three measures of earnings management, two of which are accounting (accrual) manipulation measures (discretionary accruals and abnormal working capital accruals) and one a real activities manipulation measure (abnormal operating cash flows). Our key findings are that earnings management prior to bankruptcy significantly reduces the likelihood of Chapter 11 plan confirmation and emergence from Chapter 11. The results are driven primarily by extreme values of earnings management, characterized by one or two standard deviations above or below the (zero) mean. The findings are consistent with creditors reacting positively to unduly conservative earnings reports and negatively to overly optimistic earnings reports. We find clear evidence that upward management of earnings destroys economic value by making the survival of the firm less likely, an effect that has not previously been uncovered by the literature. We also find that stressed firms are less likely to have their plans confirmed while the auditor choice (Big4 vs. non-Big4) positively affects the probability for plan confirmation as well as the likelihood of emergence from bankruptcy.
