Download or read book Assessing the Impact of a Change in the Level of Manager Discretion on the Informativeness of Earnings written by Alan M. Teixeira and published by . This book was released on 2003 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: There is a high level of interest in the relative merit of principles based standards versus rules based standards. At the heart of the debate appears to be the level of discretion available to managers under the alternative approaches, the consequence of which is perceived to be earnings management.I compare earnings aggregations reported under an accounting standard that provided interpretive slack within the definitions of operating, abnormal and extraordinary activity with contrived data sets that measure earnings components quot;as ifquot; the interpretive slack had been removed. I find that managers do manage components of earnings between aggregations. The results suggest that the identification of unusual earnings components by managers increased the informativeness of reported earnings.There is no evidence to suggest that manager discretion reduced the informativeness of earnings. There is no evidence to suggest that investors were misled by the manipulations.This study makes several contributions. It addresses the basic issue of the extent to which a change in the level of discretion available to managers in measuring and reporting accounting earnings is likely to affect its informativeness. This is a direct test of a framework that provides earnings management opportunities. This study also focuses on classificatory management and, as such, is unencumbered by earnings expectations error.

Download or read book The Effect of Investment Opportunity Set and Debt Level on Earnings Returns Relationship and the Pricing of Discretionary Accruals written by Ferdinand A. Gul and published by . This book was released on 2000 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study examines whether the informativeness of earnings and the pricing of discretionary accruals by the market are associated with investment opportunity set (IOS) and debt levels. We show that the earnings-returns relationship is impacted positively by IOS but negatively by debt after controlling for other confounding variables such as size, beta, persistence of earnings and regulatory environment. We then show that the market prices discretionary accruals at a higher level for high-IOS firms than for low-IOS firms. The evidence on the effect of debt on the pricing of discretionary accruals is weaker but negative. We show further that the positive association of discretionary accruals with future profits is further improved in high-IOS firms but weakened in high-debt firms. This is consistent with the view that managers use discretionary accruals as a means to signal future opportunities for growth. In effect, this efficient earnings management can be significant, especially in high-IOS firms. More interestingly, opportunistic earnings management is not the only motivation for earnings management under all circumstances.Key Words: Earnings management; Investment opportunity set; Capital markets; Valuation; Discretionary accruals.

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 Financial Reporting on Earnings Management written by David Onditi and published by GRIN Verlag. This book was released on 2019-09-23 with total page 9 pages. Available in PDF, EPUB and Kindle. Book excerpt: Essay from the year 2017 in the subject Business economics - Accounting and Taxes, grade: A, University of Nairobi, language: English, abstract: This paper discusses the motives behind earnings management and explains some of the methods used by firms to manage their earnings. Earnings management has been defined differently by a number of scholars. It is important to note that there is a thin line between fraud and earnings management. Hamid, Hashim and Salleh citing the works of Brown, Perols and Lounge and Erickson, Hanlon and Maydew noted the difference in the definitions that are offered by the scholars. According to Perols and Lounge organizations will engage in fraud due to the constraints on earnings management. The research found out that the firms that had engaged in earnings management will be more likely to be involved in cases of fraud. Brown and Erickson et al noted that the difference between earnings management and fraud is that earnings management is usually within the scope of the generally accepted accounting principles (GAAP) while fraud is outside of the boundaries of GAAP. Earnings management has been defined as the manipulation of the financial statements and reports by the managers so that the firms can earn extra profit. It has also been defined as the action where the management of the organizations apply their own self-assessment in the communication of the financial information and transactions to modify the financial data for two main reasons: 1) influencing contractual businesses that solely rely on the financial information or 2) providing the stakeholders with a wrong impression about the financial position of the firm.

Download or read book Discretionary Reporting of Earnings Components written by Catherine M. Schrand and published by . This book was released on 2011 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper provides evidence that in quarterly earnings announcements, managers use discretion to strategically report a large, transitory component of prior-period earnings. Managers are more likely to report separately a prior-period transitory gain from the sale of property, plant, and equipment (PPE) than to report a loss. This strategy provides the lowest possible benchmark to evaluate current earnings, thereby allowing the manager to highlight the largest possible change in earnings. This strategic reporting behavior is consistent with a conjecture by managers that investors will forget the transitory nature of the prior-period gain/loss unless it is separately reported in the current earnings announcement. Consistent with this conjecture of an investor processing bias, the stock price reactions suggest that the market does not unravel the strategic reporting at the time earnings are announced. There is some evidence that the market corrects for this bias in the 30 days subsequent to the earnings announcement date.

Download or read book Management Control Systems written by Kenneth A. Merchant and published by Pearson Education. This book was released on 2007 with total page 876 pages. Available in PDF, EPUB and Kindle. Book excerpt: With its unique range of case studies, real life examples and comprehensive coverage of the latest management control-related tools and techniques, Management Control Systems is the ideal guide to this complex and multidimensional subject for upper level undergraduates, postgraduates and practising professionals.

Download or read book Curbing Earnings Management written by Jeffrey Hales and published by . This book was released on 2018 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine how clawback provisions and board monitoring affect managers' use of discretion to achieve earnings targets. Using an experiment, we find that when board monitoring is weak, imposing clawback provisions has little impact on the total amount of earnings management activity. This null result arises because, while clawbacks do curb the extent to which managers make accrual estimates in line with their own preferences (accrual earnings management), these provisions also increase managers' use of discretion when making operational decisions (real earnings management). In contrast, strong board monitoring results in less of both types of earnings management. Our results have important policy implications by demonstrating that, because of the ability to substitute accrual earnings management with real earnings management, mandated clawbacks (in the absence of strong board monitoring) alter how managers use their discretion, whereas strong board monitoring alters how much discretion managers are willing to use.

Download or read book The Statistical Theory of Linear Systems written by E. J. Hannan and published by SIAM. This book was released on 2012-05-31 with total page 418 pages. Available in PDF, EPUB and Kindle. Book excerpt: Originally published: New York: Wiley, c1988.

Download or read book Bias and Measurement Error in Discretionary Accrual Models written by Glen A. Hansen and published by . This book was released on 2000 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines bias and measurement error in discretionary accrual models. This is important because the empirical evidence supporting the conclusions from many earnings management studies is based entirely on estimates from these models. Models of discretionary accruals are actually models of expected and unexpected accruals. Therefore for most earnings management studies, unexpected accruals that arise for reasons other than managerial discretion over financial reporting represent measurement error in discretionary accruals. This study proposes that unexpected accruals will arise from large structural changes such as acquisitions and divestitures. Since most earnings management studies examine managerial discretion over financial reporting these unexpected accruals represent measurement error. I find that structural changes are associated with the direction and magnitude of discretionary accrual estimates. Also, the measurement error associated with these structural changes is correlated with the level of earnings. Since the level of earnings is often used by researchers to partition earnings management incentives (or is correlated with the partitioning variable). This suggests that the empirical results from many earnings management studies are biased.

Download or read book Discretionary Accruals Earnings Management and the Valuation of Earnings written by Anwer S. Ahmed and published by . This book was released on 2000 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This study investigates how discretionary accruals affect earnings valuation (or price-earnings) multiples to provide indirect evidence on whether managers use their discretion over accruals to communicate their private information or to obtain private benefits. I find that earnings multiples are significantly higher when earnings contain large income increasing discretionary accruals than when earnings contain small discretionary accruals. Furthermore, in periods of high performance earnings multiplies are significantly lower when earnings contain large income decreasing discretionary accruals than when earnings contain small discretionary accruals. These results are consistent with the communication hypothesis. The effect of large income decreasing discretionary accruals in periods of moderate performance is mixed and in periods of low performance is not significant. The study (i) extends the literature on earnings multiples, (ii) suggests that effects of discretionary accruals depend on the context in which they are reported, and (iii) suggests that reduction of managerial discretion via accounting standards is costly because it eliminates the opportunity to communicate.

Download or read book The Impact of Earnings Management on the Value Relevance of Financial Statement Information written by Catherine Whelan and published by . This book was released on 2004 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the relative value-relevance of both earnings and book value in the presence of three alternative sources of earnings management: short-term discretionary accruals, long-term discretionary accruals, and total discretionary accruals. For firm's whose discretionary accruals indicate earnings management, the value-relevance of earnings is expected to be lower than for firms without earnings management. Furthermore, in the presence of earnings management, it is expected that there will be a shift from a reliance on earnings to a reliance on book value in the valuation process. This would be reflected in a decrease in the value-relevance of earnings and an increase in the value-relevance of book value. Discretionary accruals are commonly used as a measure of earnings management. A contribution of this paper is the development of models to estimate short-term and long-term discretionary accruals. This enables investigation of differential effect on value-relevance of earnings management through the use of short-term versus long-term discretionary accruals. The results demonstrate that earnings management has an impact on value-relevance. Moreover, earnings management via long-term discretionary accruals has a greater impact on the value-relevance of earnings and book value than earnings management via short-term discretionary accruals.

Download or read book Dissertation Abstracts International written by and published by . This book was released on 1998 with total page 508 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book The Consequences of Management Earnings Forecast Regulation written by Bin Ke and published by . This book was released on 2019 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the consequences of a management earnings forecast regulation implemented in a staggered manner. The regulation substantially increases the directly affected firms' frequency of management forecasts. Nevertheless, approximately 14% of the directly affected firms fail to comply with the regulation (noncompliant firms). The regulation helps increase the stock price informativeness of the directly affected firms that issue a forecast. The regulation also helps increase the stock price informativeness of the noncompliant firms (a spillover), but we find no evidence of a similar spillover for the firms that are not required to issue mandatory forecasts in the post-regulation period.

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 Information Content of Earnings Management written by Yanfeng Xue and published by . This book was released on 2004 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines whether managers signal firms' future performance by managing earnings to exceed thresholds. Because managers' reporting discretion is bounded by the accounting regulations, managing earnings to exceed the current period's thresholds reduces future earnings, making future earnings thresholds more difficult to attain. As a result, only firms with sufficient future earnings growth can benefit from doing so. I test the signaling hypothesis in three steps. I first hypothesize that firms with a higher degree of information asymmetry between the management and investors are more likely to signal performance using earnings thresholds. Consistent with the hypothesis, I find that the discontinuities in earnings distributions around thresholds are significantly more salient for more information-strained firms. In the second step, I examine the credibility of the signal and document that firms that marginally exceed the earnings thresholds demonstrate superior future accounting performance compared with firms just missing the thresholds, and this difference in future performance increases with the degree of information asymmetry. The third step of my analysis studies the market's reaction to firms' beating or missing the thresholds. My empirical results suggest that the capital market recognizes the information content of the earnings management activities and rationally incorporates it in setting prices.

Download or read book THE IMPACT OF ADJUSTED EARNINGS PRACTICES ON FIRM PERFORMANCE written by John McKenna and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: "Show me the incentive and I will show you the outcome". Charlie Munger The use of adjusted earnings as a presentation alternative to GAAP earnings is intended to help financial statement users understand the underlying performance of a company. The approach is highly prevalent and growing in frequency and adjustment magnitude, as "by 2017, for example the average adjustment per firm was 26 cents per share or about 15% of average GAAP earnings per share" (Rouen, So, and Wang, 2020, p. 3). While some adjustments are standard adjustments for non-recuring items like accounting rule changes, or part of a set of consistently communicated recurring items, there is another group of adjustments that are infrequent, subject to considerable management latitude and often inconsistently categorized. Across the range of academic research on this phenomenon, there are questions regarding management motivation, communication clarity and persistence of these non-GAAP adjustments. There is a broader question regarding business decision rigor, and quality of earnings versus peers for those firms with a large adjusted to reported earnings difference. In Chapter 3, I assess the consequences of the use of Adjusted Earnings, by testing whether the size of the difference between reported and adjusted earnings is associated with a difference in performance against a set of key firm performance measures. The underlying hypothesis is that firms with a large adjusted-earnings differential have weaker underlying operational performance, compared to their peers and that ultimately the decisions and adjustment actions being taken (e.g., more acquisitions, business reorganizations or "one-offs") that drive up the earnings adjustment subsequently erode performance. The study of a set of large New York Stock Exchange (NYSE) listed companies over a ten-year period (2011 through 2020) showed that firms with large adjusted-earnings differentials had statistically significant performance gaps versus peers that had smaller earnings adjustments on return on assets (ROA) and return on equity (ROE), both contemporaneously and prospectively. There were also performance differences in current year total shareholder return (TSR), although that was mostly a short-term phenomenon and did not hold for future TSR. The study results were particularly significant for the operational measure return on assets (ROA). The tests controlled for firm sector, size and leverage ratio. In Chapter 4, I examine whether CEO incentive compensation (total current year variable pay, variable pay as a percentage/fraction of total compensation, and unvested equity) is a possible cause of the expanded use of Adjusted Earnings practices, and associated with the size of the difference between adjusted and reported earnings. The hypothesis for this follow-on study was that CEO incentives are enhanced by a higher adjusted earnings number, given the typical structure of incentive plans and thus they could influence higher adjusted-earnings differentials. The literature is mixed on this topic as some studies like Black, Black, Christensen and Gee (2021) show no significant relationship between CEO pay and aggressive non-GAAP earnings reporting, while others show that large positive non-GAAP earnings adjustments predict abnormally high CEO Pay (Guest, Kothari and Pozen, 2017). Cohen, Dey and Lys (2008) found that unexercised options were positively associated with income-increasing accrual-based earnings management activities, but that activity is not necessarily impacting reported performance measures (p. i). This second study, found only partial statistical support for the hypothesis that current year variable compensation was associated with the Adjusted Earnings differential, but it was inconclusive. There was statistical significance for the tests of the variable compensation ratio and total unvested equity being related to future adjusted earnings differentials, but those findings were at a relatively low significance level.

Download or read book The Effects of Governance Structure and Ownership Structure on the Informativeness of Earnings written by Steven T. Petra and published by . This book was released on 2002 with total page 129 pages. Available in PDF, EPUB and Kindle. Book excerpt: