Purpose -The aim of this paper is to examine empirically the managerial earnings management practices of financially distressed firms, and to consider whether these practices changed during the recent global financial crisis. Although corporate distress has been a topic of research interest for many years, earnings manipulation by distressed firms has received relatively little attention. Design/methodology/approach -The paper uses three measures of distress, and discretionary accruals, a popular proxy for earnings management, to investigate the impact of distress on earnings management. Findings -The paper finds that managers of distressed firms engage more in income-decreasing earnings management practices compared to their healthy firm counterparts. The paper also finds some evidence of the effect of the global financial crisis on the association between financial distress and earnings management. Finally, the paper shows some evidence of positive market pricing of discretionary accruals in the non-crisis period, but a substantial reduction in pricing coefficients during the global financial crisis period. Practical implications -Financial distress experienced by firms provides incentives to managers for earnings manipulation. However, the direction of the earnings management could be income-increasing or income-decreasing. The findings from this study will allow investors to make better investment decisions for firms that are experiencing financial difficulties. Originality/value -This paper is the first in New Zealand to investigate the association between firm distress and managerial earnings management decisions. Recently, New Zealand experienced a spate of finance company collapses that somewhat contributes, indirectly, to financial distress experienced by firms. The New Zealand reporting environment is characterized by concentrated ownership, relaxed monitoring by regulatory authorities, and a very low litigation threat that provides an interesting setting to examine the research question. This paper is also the first to test the market pricing of earnings components in New Zealand.
The impact of the adoption of International Financial Reporting Standards (IFRS) on the accounts and the quality of earnings of New Zealand firms is examined. Our analysis of IFRS adjustments for the last period under pre‐IFRS NZ Generally Accepted Accounting Principles (GAAP) reveals that total assets, total liabilities and net profit were significantly higher under IFRS than under pre‐IFRS GAAP. Profit and equity under IFRS were increased by adjustments for goodwill and other intangibles and investment property, and decreased by adjustments for employee benefits and share‐based payments. Using data for 2002–2009, we find that absolute discretionary accruals were significantly higher under IFRS than under pre‐IFRS NZ GAAP, suggesting lower earnings quality under IFRS than under pre‐IFRS NZ GAAP. However, we find no significant differences in signed discretionary accruals and the ability of earnings to predict one‐year‐ahead cash flows between pre‐IFRS NZ GAAP and IFRS. These results are consistent across alternative measures of accruals quality, sample selection and whether firms elected to adopt IFRS in 2005 rather than comply with them in 2007.
Conflicting evidence on weak form efficiency of the Dhaka Stock Market appears to stem from the use of monthly versus daily data, structural changes after the 1996 market crash, and the use of tests with or without heteroscedasticity adjustment. Heteroscedasticity-robust tests indicate short-term predictability of share prices prior to the crash, but not afterwards. Although a heteroscedasticity-robust Box-Pierce test was used by Lo and MacKinlay (1989) in their simulations, our study appears to be the first to apply this test to stock prices. Typical rejection of weak-form market efficiency by the usual autocorrelation tests may be reversed by a heteroscedasticity-robust test. Copyright Blackwell Publishers Ltd, 2005.
Purpose -This paper aims to provide preliminary evidence on the determinants of non-audit service provision and whether the provision of such services impairs auditors' independence in the context of Bangladesh. Design/methodology/approach -Both univariate and multivariate regression methodologies are used to test the hypotheses. Signaling theory is used to test whether auditors from a non-litigious environment are concerned about signaling their quality to the market by constraining clients' earnings management behavior. Findings -Results show that larger firms, firms with more liquidity, firms having an audit firm with an international link as their auditor and multinational subsidiaries purchase more non-audit services, while highly-leveraged firms purchase less. With respect to non-audit fees (NAF) causing auditors to sacrifice their independence, this study fails to find any relationship between NAF and discretionary accruals (DACCR) after controlling for factors that are expected to drive DACCR behavior.Research limitations/implications -Use of DACCR as an earnings management device has been criticized on the ground that managers could use DACCR to signal their own private information. Hence, future research should look at alternative proxies of earnings management to investigate the relationship between non-audit services and earnings management. Practical implications -The findings of this paper will be of use to financial reporting regulatory authorities in Bangladesh, such as the Securities and Exchange Commission of Bangladesh as well as the Institute of Chartered Accountants of Bangladesh, regarding the corporate governance role played by the auditors. Originality/value -Use of DACCR to detect earnings management behavior in the context of Bangladesh is a novel idea. The findings that the purchase of non-audit services does not lead to increased earnings management behavior in a developing country context further strengthens the notion that there is a spill-over effect of providing non-audit services.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.
hi@scite.ai
10624 S. Eastern Ave., Ste. A-614
Henderson, NV 89052, USA
Copyright © 2024 scite LLC. All rights reserved.
Made with 💙 for researchers
Part of the Research Solutions Family.