Effect of Accounting Discretion on Ability of Managers to Smooth Earnings

Tan, Hwee Cheng; Jamal, Karim

doi:10.2139/ssrn.837204

Cited by 19 publications

(21 citation statements)

References 23 publications

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“…The international literature, works on the relationship between market returns and the degree of income smoothing in business include those of Wooton (1995, 1999), Booth, Kallunki and Martikainen (1996), Bin, Wan and Kamil (2000), Iñiguez and Poveda (2004), Bao and Bao (2004), Tan and Jamal (2006), Tucker and Zarowin (2006) and Grant, Markarian and Parbonetti (2007), analyzing the American, Finnish, Malay and Spanish markets. Of these, only those of Michelson et al (1995Michelson et al ( , 1999 and Iñiguez and Poveda (2004) contain long-term analyses, and the authors come to very different conclusions, working with different methodologies.…”

Section: Introductionmentioning

confidence: 99%

The smoothing hypothesis, stock returns and risk in Brazil

Martinez

Castro

2011

BAR, Braz. Adm. Rev.

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Income smoothing is defined as the deliberate normalization of income in order to reach a desired trend. If the smoothing causes more information to be reflected in the stock price, it is likely to improve the allocation of resources and can be a critical factor in investment decisions. This study aims to build metrics to determine the degree of smoothing in Brazilian public companies, to classify them as smoothing and non-smoothing companies and additionally to present evidence on the long-term relationship between the smoothing hypothesis and stock return and risk. Using the Economatica and CVM databases, this study focuses on 145 companies in the period 1998-2007. We find that Brazilian smoothers have a smaller degree of systemic risk than non-smoothers. In average terms, the beta of smoothers is significantly lower than non-smoothers. Regarding return, we find that the abnormal annualized returns of smoothers are significantly higher. We confirm differences in the groups by nonparametric and parametric tests in cross section or as time series, indicating that there is a statistically significant difference in performance in the Brazilian market between firms that do and do not engage in smoothing.

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Section: Introductionmentioning

confidence: 99%

The smoothing hypothesis, stock returns and risk in Brazil

Martinez

Castro

2011

BAR, Braz. Adm. Rev.

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“…Real earnings manipulation takes place when management makes decisions concerning the timing and scale of the underlying business activities in order to alter financial statements (Tan and Jamal, 2006). One example of real earnings management is the situation of overproduction, i.e., when a company produces more finished goods inventory than it can sell.…”

Section: Earnings Management: Methods and Motivesmentioning

confidence: 99%

Earnings management and R&D costs capitalization: evidence from Russian and German markets

Garanina

Nikulin

Frangulantc

2016

Investment Management and Financial Innovations

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Purpose: The goal of the paper is to analyze the motives that determine the propensity of companies in both developed and developing countries to engage in earnings management on the basis of accounting treatment of R&D costs.Methodology: The final sample analyzed in the paper is 47 Russian companies and 74 German companies for the period 2012-2013.Findings: The results of the research show that managers of companies in Russia and in Germany are engaged in earnings management practices using R&D costs, although the incentives for these actions are different. In the case of Russian companies, managers enjoy discretion in accounting choices when trying to meet debt covenants by adopting those methods that increase financial results. German managers are focused more on the other type of earnings management incentives -earnings smoothing. There is evidence that the amount of capitalized R&D costs in German companies increases when financial results vary more.Value: There is some evidence in favor of the presence of earnings management incentives in the decision to capitalize R&D costs in developed markets. However, this problem has rarely been studied in developing markets, and there is no comparison between the practices of developed and developing countries in the field. In this paper authors attempt to test the assumption that the contextual factors in developed and developing markets can differ, and thus they may provide different incentives for earnings management on the basis of R&D costs.

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“…Roychowdhury (2006) demonstrates that managers inflate earnings by overproduction and liberal credit policies and reducing discretionary expenditures in order to avoid reporting losses or meet analyst forecasts. Ewert and Wagenhofer (2005) and Tan and Jamal (2006) suggest that companies manipulate operating activities to adjust the underlying earnings to reach special aims when more perfect accounting standards and more stringent supervisory regulations reduce accounting flexibility. Real earnings management is not in violation of Generally Accepted Accounting Principles, and the possibility of detection by regulators and auditors is lower because of high concealment and low risk characteristics (Zang, 2012;Graham et al, 2005).…”

Section: Real Earnings Management and Stock For Stock Mandamentioning

confidence: 99%

Under-performance of listed companies? Real earnings management and M&A: Chinese empirical evidence

Zhang

2015

JIEM

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Abstract:Purpose: The purpose of this paper is to examine whether acquiring firms attempt to adopt real earnings management strategy to upward reported earnings in the period of M&A Findings: It was found that firms using stock as a financing medium exhibit significant negative abnormal cash flows and abnormal discretionary expenses yet abnormal production costs significantly positive during the current period of M&A. Moreover, it was also documented that acquiring firms use real activities manipulation to overstate earnings for the purpose of improving market confidence. Finally, a negative association was found between REM and under-performance of post-M&A.-322-Journal of Industrial Engineering and Management -http://dx.doi.org/10.3926/jiem.1330Research limitations/implications: To some extent, these results explain the puzzle of performance decline over the following period of post-M&A. Meanwhile, our study adds to prior literature that capital market pressures induce acquiring firms inflate reported earnings by manipulating real activities in stock-financed M&Aoccurring in China's capital market. Practical implications:The author's result imply that investors, analysts and regulators cannot ignore more undetectable opportunism behaviors underlying reported earnings than accrualbased earnings management and the impact on the performance of post-M&A when they use financial statements to evaluate acquiring firms. Social implications:Our study plays important role in making public policies. Furthermore, it is necessary to improve outside supervisory mechanism and strengthen construction of honesty and faithfulness so as to realize the main purpose of value creation in M&A.Originality/value: The paper extends prior literature by taking a closer look at acquiring firms' managerial myopia behavior in stock-financed M&A. The administrators of acquiring firms have strong incentives to manage earning upward by adopting a more subtle way which is a costly means because it has value-destroying effect on performance of post-M&A.

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Effect of Accounting Discretion on Ability of Managers to Smooth Earnings

Cited by 19 publications

References 23 publications

The smoothing hypothesis, stock returns and risk in Brazil

The smoothing hypothesis, stock returns and risk in Brazil

Earnings management and R&D costs capitalization: evidence from Russian and German markets

Under-performance of listed companies? Real earnings management and M&A: Chinese empirical evidence

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Effect of Accounting Discretion on Ability of Managers to Smooth Earnings

Cited by 19 publications

References 23 publications

The smoothing hypothesis, stock returns and risk in Brazil

The smoothing hypothesis, stock returns and risk in Brazil

Earnings management and R&amp;D costs capitalization: evidence from Russian and German markets

Under-performance of listed companies? Real earnings management and M&A: Chinese empirical evidence

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Earnings management and R&D costs capitalization: evidence from Russian and German markets