Equity Financial Assets: A Tool for Earnings Management—A Case Study of a Chinese Corporation

Guo, Yuanyuan; Lu, Siqi; Ronen, Joshua; Ye, Jianfang

doi:10.1111/abac.12151

Cited by 13 publications

(15 citation statements)

References 22 publications

(19 reference statements)

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“…It could also be noted that differentiating between short-and long-term investments may foster opportunistic behavior and classificatory manipulation (Guo et al, 2019). Effective corporate governance is therefore crucial in such a context.…”

Section: Classification Criteria For a New Asset Class Of Long-term Equity Investmentsmentioning

confidence: 99%

Accounting for sustainable finance: does fair value measurement fit for long-term equity investments?

Palea

2021

MEDAR

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Purpose The purpose of this paper is to discuss whether fair value accounting fits for long-term equity investments, which are considered key to retool economies according to sustainability criteria. In doing so, the paper focuses on the European Union and addresses the European Commission’s (2018a) concern that current accounting rules are unfit for achieving the United Nations Sustainable Development goals and the targets of the Paris Agreement on climate change. Design/methodology/approach The paper grounds in a wide literature review on the effects of fair value accounting on investors’ asset allocation strategies. By critically integrating literature on the notion of long-term investment with theories and possible accounting approaches, the paper provides implications for a revision of the current measurement system for long-term equity investments. Findings The literature review supports the view that fair value accounting has played a role in discouraging equity investments over time, thus leaving economies with poorer risk-sharing and weaker long-term investments. The paper contributes to the debate on alternative measurement systems by suggesting possible solutions in relation to controversies arising from empirical evidence. Originality/value Reorienting economies according to sustainability criteria represents an urgent issue which requires prompt and policy-oriented responses. Accordingly, this paper offers insights and guidelines that can help policymakers revise current accounting rules for long-term equity investments in line with sustainable development objectives.

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Section: Classification Criteria For a New Asset Class Of Long-term Equity Investmentsmentioning

confidence: 99%

Accounting for sustainable finance: does fair value measurement fit for long-term equity investments?

Palea

2021

MEDAR

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“…It is evident from current study by (Mellado & Saona, 2019) who found that institutional investment and effective regulatory system reduces REM. (Guo, Lu, Ronen, & Ye, 2019) found further that stable and long term sighted institutional investment reduces cost of equity. Foreign institutional investors plays significant role in curtailing EM practices specially in firms, where monitoring is more valuable (Lel, 2019).…”

Section: Recommendationsmentioning

confidence: 88%

An Inquiry into Earning Management Motives: Evidence from Pakistani Distressed and Non-Distressed Firms

Aman

Jan

Ullah

et al. 2019

NRJSS

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This research takes in view the motives that drive opportunistic managers in the Pakistani corporate world to manipulate firm earnings in different financial circumstances by resorting to real (REM) and accrual (AEM) earning management to reap their self-interests. The present study undertakes 188 distressed and 37 non-distressed firms for the sample period of 2010-2017. The summary stats confirm that both in distressed and non-distressed firms’ managers resort to REM practices more than AEM. The factors that urge mangers to take REM practices in distressed firms i.e., debt covenant restriction, managerial ownership and tax avoidance needs to be amended in such a way that it demotivates managers for carrying such practices in distressed firms. The factors that influence AEM practices in distressed firms are debt covenant restrictions, institutional ownership, highly valued firms and managerial ownership whereas in non-distressed firm these factors are debt covenant and effective tax rate. In non-distressed firms motives that urge mangers to adopt REM, practices are raising additional capital and tax avoidance practices.

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“…Guo et al. (2019) show that firms reclassify their AFS equity investments as long term to decrease the volatility in their reported profits. Khan and Bradbury (2014) find that OCI displays higher volatility relative to net income, but this higher volatility has no association with higher market risk (the market does not price the volatility).…”

Section: Literature Review and Hypothesesmentioning

confidence: 99%

Classification of Equity Instruments under IFRS 9: Determinants and Consequences

Pinto

Morais

2022

Australian Accounting Review

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One of the main differences between International Financial Reporting Standard (IFRS) 9 Financial Instruments and International Accounting Standard (IAS) 39 Financial Instruments: Recognition and Measurement is the classification and measurement of equity instruments that are financial assets. Under IFRS 9, a firm must measure acquired equity instruments at fair value through profit or loss (FVPL) unless the firm irrevocably chooses at initial recognition to measure those assets at fair value through other comprehensive income (FVOCI). In this case, a firm must recognise all changes in FVOCI without the possibility of reclassifying these amounts into profit or loss. In this context, this study has two main objectives. First, it examines the frequency of firms that elect to classify equity instruments as FVOCI in the first year of IFRS 9 adoption and identifies the determinants of the decision to classify equity instruments as available for sale (AFS) (under IAS 39) or as financial assets at FVOCI (under IFRS 9). Second, it considers whether this choice has any influence on the value relevance of financial information. The results of a sample based on firms in the FTSE 100 and EURO STOXX 50 show that risk is the main determinant of the reclassification from AFS to FVOCI in the first year of IFRS 9 adoption, while the level of variable compensation for CEOs (for AFS) and the level of fair value hierarchy (for AFS and FVOCI) are the main determinants for the classification of equity instruments. Regarding the consequences of this change, the findings indicate that the prohibition of recycling for the FVOCI option under IFRS 9 leads investors to pay more attention to the changes in fair value as recognised in OCI.

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Equity Financial Assets: A Tool for Earnings Management—A Case Study of a Chinese Corporation

Cited by 13 publications

References 22 publications

Accounting for sustainable finance: does fair value measurement fit for long-term equity investments?

Accounting for sustainable finance: does fair value measurement fit for long-term equity investments?

An Inquiry into Earning Management Motives: Evidence from Pakistani Distressed and Non-Distressed Firms

Classification of Equity Instruments under IFRS 9: Determinants and Consequences

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