Impact of proximity to debt covenant violation on earnings management

Franz, Diana R.; Hassabelnaby, Hassan R.; Lobo, Gerald J.

doi:10.1007/s11142-013-9252-9

Cited by 155 publications

(94 citation statements)

References 57 publications

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“…In Model 3, I further control for the leverage of firms. Some studies show that firms with higher leverage have an incentive to manage earnings to avoid violations of financial covenants in debt contracts [42]. However, others show that firms with higher leverage are less likely to manage earnings because of stronger monitoring by debt holders [29,43].…”

Section: Research Modelmentioning

confidence: 99%

Is Narcissism Sustainable in CEO Leadership of State-Owned Enterprises?

Kim

2018

Sustainability

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The state sector has been an important part of many economies. This study measures the narcissism of the chief executive officers (CEOs) of state-owned enterprises (SOEs) unobtrusively, and examines the effect of narcissism on the performance and accounting earnings management of firms. This study shows that the narcissism of CEOs positively affects the performance of SOEs, and that the positive effect is a result of real management decisions rather than accounting earnings management. It also shows that CEO narcissism does not affect the earnings management of SOEs. However, this relation changes as the tenure of the CEO gets longer. As tenure gets longer, a CEO's narcissism negatively affects the performance of a SOE, and a CEO with high narcissism is likely to be involved in earnings management to make up for weak performance. This study suggests that narcissism is not a sustainable leadership style. It also suggests that the personal characteristics of executives in public corporations are important in determining the performance of firms. While a longer tenure ensures that a CEO will pursue his/her strategy steadily, the leadership of a narcissistic CEO becomes negative and ineffective as their tenure gets longer. Considering the importance of SOEs in the economy, this is an important policy implication, as the appointment of a CEO and length of tenure are likely to be determined by the government.

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Section: Research Modelmentioning

confidence: 99%

Is Narcissism Sustainable in CEO Leadership of State-Owned Enterprises?

Kim

2018

Sustainability

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“…Moreover, DeFond and Jiambalvo () and Franz et al. () suggest that firms with high leverage are more likely to manipulate accruals to avoid debt covenant violation. Hence, we include Leverage to control for the possibility that highly leveraged firms tend to overstate earnings.…”

Section: Empirical Modelsmentioning

confidence: 99%

Credit Ratings and Earnings Management around IPOs

Gounopoulos

Pham

2016

Business Fin & Account

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This study examines the impact of having a credit rating on earnings management (EM) through accruals and real activities manipulation by initial public offering (IPO) firms. We find that firms going public with a credit rating are less likely to engage in income-enhancing accrual-based and real EM in the offering year. The monitoring by a credit rating agency (CRA) and the reduced information asymmetry due to the provision of a credit rating disincentivise rated issuers from managing earnings. We also suggest that the participation of a reputable auditing firm is crucial for CRAs to effectively restrain EM. Moreover, we document that for unrated issuers, at-issue income-increasing EM is not linked to future earnings and is negatively related to post-issue long-run stock performance. However, for rated issuers, at-issue incomeincreasing EM is positively associated with subsequent accounting performance and is unrelated to long-run stock performance following the offering. The evidence indicates that managers in unrated firms generally manipulate earnings to mislead investors, while managers in rated firms tend to exercise their accounting and operating discretion for informative purposes.

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“…In other words, they do not alter real business activities but rather use management discretion regarding accounting choices (Eldenburg et al, 2010). Examples of accrual-based earnings management are delaying expense recognition and accelerating income recognition (Franz et al, 2014). …”

Section: Earnings Management: Methods and Motivesmentioning

confidence: 99%

“…Managers are highly motivated to meet debt covenants and eliminate the opportunity for technical default (Franz et al, 2014). Previous research has indicated that the probability of earnings management increases when a company is near to the debt covenants violation.…”

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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Impact of proximity to debt covenant violation on earnings management

Cited by 155 publications

References 57 publications

Is Narcissism Sustainable in CEO Leadership of State-Owned Enterprises?

Is Narcissism Sustainable in CEO Leadership of State-Owned Enterprises?

Credit Ratings and Earnings Management around IPOs

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

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Impact of proximity to debt covenant violation on earnings management

Cited by 155 publications

References 57 publications

Is Narcissism Sustainable in CEO Leadership of State-Owned Enterprises?

Is Narcissism Sustainable in CEO Leadership of State-Owned Enterprises?

Credit Ratings and Earnings Management around IPOs

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

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Product

Resources

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