Managerial Equity Holdings and Income Smoothing Incentives

Shu, Sydney Qing; Thomas, Wayne B.

doi:10.2139/ssrn.2647033

Cited by 3 publications

(3 citation statements)

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“…In addition, to confirm that our findings are not driven by the possibility that smoothed future earnings are simply more predictable, we use future cash flow (CFO it+1 ), not only future earnings (EARN it+1 ), as the dependent variable (Shu and Thomas, 2019). We deal with this issue by concentrating on future cash flows, which are independent of future earnings' properties (Baik et al 2020).…”

Section: Research Models and Variables Measurementmentioning

confidence: 70%

Dividends Payout and Earnings Predictability: Evidence from a Developing Country

Diab

Eissa²,

Abdelazim³

2022

Acad. J. Interdiscip. Stud.

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This study investigates the relation between dividends payout and earnings predictability of firms listed on the Egyptian Stock Exchange as an emerging African market. We depend on a sample of firms listed on the Egyptian stock exchange (EGX100) during 2014-2018. To test the hypotheses, we use two independent sample t-test and OLS regression. The principal analysis revealed that dividends payout improves the ability of current earnings to forecast firms’ future earnings. Results also indicated that dividends payout could enhance the ability of current earnings to forecast one year-ahead cash flow. To the best of our knowledge, this is the first study that examines the implications of dividends payout on earnings predictability in the Egyptian market. The findings present new insights to investors, researchers, and regulators concerned with agency conflicts of interest within the firm. It also presents evidence on the potential alternative mechanisms for decreasing agency costs in African emerging markets. Received: 8 April 2022 / Accepted: 4 August 2022 / Published: 2 September 2022

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Section: Research Models and Variables Measurementmentioning

confidence: 70%

Dividends Payout and Earnings Predictability: Evidence from a Developing Country

Diab

Eissa²,

Abdelazim³

2022

Acad. J. Interdiscip. Stud.

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“…Management's actions to make income smoothing are generally based on various reasons including meeting internal targets, meeting external parties' expectations, making stable profits, and making financial statements appear to be good for the benefit of the company. In some previous studies, profitability, liquidity, capital structure, and Size of Company are factors that influence income smoothing [2]. Several studies on income smoothing practices have been carried out, which revealed that profitability has a significant effect on income smoothing practices.…”

Section: Introductionmentioning

confidence: 99%

The Effect of Financial Performance to Income Smoothing Practice in Property and Real Estate Companies Listed on Indonesia Stock Exchange

Nurul¹

2020

Proceedings of the Annual International Conference on Accounting Research (AICAR 2019)

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Study aims to obtain empirical evidence of the influence of financial performance proxied by profitability, liquidity and capital structure to income smoothing practice. The population of this study covers property and real estate companies at Indonesia Stock Exchange on period 2014-2017. The indicators which are used to measure income smoothing practice was measured using Eckel index. Mechanical sample selection using purposive sampling and acquired 32 companies that were included with period by 4 years in order to get the 128 samples was observed. Model data analysis in this research is logistic regression analysis with using software SPSS 22. From this study, the result of a combination of independent variables that are profitability, liquidity, capital structure and size of company as control variable, are able to explain the variation of the dependent variable is income smoothing practice for 22.10% and 77.90% the rest is explained by other factors were not involved in this model. The results also showed simultaneous independent variables that are profitability, liquidity, and capital structure are significantly influence income smoothing practice. From the test results obtained partial results showing variable profitability (ROE) with positive direction has significant effect to income smoothing practice, variable liquidity (CR) has not significant effect to income smoothing practice, and variable capital structure (DER) with positive direction has significant effect to income smoothing practice.

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“…Managers are motivated to smooth income to deceive the awareness of investors and creditors about the firm's risks (Shu & Thomas, 2019) and the firm's probability of bankruptcy (Trueman & Titman, 1988) so as to enhance the firm's credit ratings (Jung, Soderstrom, & Yang, 2013). In the comprehensive survey of top executives, Graham et al (2005) documented that the pivotal incentive for income smoothing is to reinforce the confidence of suppliers and customers in the firm's stability to facilitate favourable trade terms.…”

Section: Hepworthmentioning

confidence: 99%

Earnings Management and Default Risk

Nguyen

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ABSTRACT This thesis comprehensively investigates the relationship between default risk (DR) and earnings management (EM) by addressing inconsistencies in prior research regarding the level and direction of EM in response to varying levels of DR. The thesis extends beyond severe financial distress to include firms with low and medium levels of distress. It examines the non-monotonic relationship between DR and EM, considering accrual earnings management (AEM), real earnings management (REM), and total earnings management (TEM). The thesis also examines the impact of DR on the relative use of REM versus AEM. The moderating effect of the global financial crisis (GFC) on the relationship between DR and EM is also explored.Using a sample of 29,228 firm-year observations from 4,514 US-listed firms during 2001-2019, the study employs both the traditional two-step and the more recent one-step approaches to identify EM. Sensitivity analysis is conducted, including and excluding mining firms.The findings reveal a non-monotonic relationship between DR and REM, with a concave pattern observed for all measures of REM. Initially, REM increases as DR rises, but it subsequently declines with further increases in DR. AEM, on the other hand, shows a convex or monotonically decreasing relationship with DR, although statistical significance is not consistently observed. The results for TEM align with those of REM, indicating the dominance of REM in TEM. These findings remain consistent when excluding mining industry observations and using different measures for EM and DR.The implications of these findings are significant for managers, firms, regulators, lenders, investors, and other stakeholders. The non-monotonic relationship between DR and REM offers insights for decision-making and determining appropriate levels of EM during varying levels of DR. Regulators can utilise this relationship to identify potential risk areas and develop effective regulations. Lenders can assess financial statements more vigilantly, and investors can make more accurate risk assessments and informed investment decisions. The robustness of the results and the inclusion of different EM measures provide valuable insights to auditors, analysts, and government professionals, enhancing their understanding of the complexities and risks associated with EM during varying levels of DR.The study also uncovers that the relative use of AEM and REM is complimentary, but the impact of DR dampens the increase in REM for a given increase in AEM. This result holds across primary and alternative measures of DR and is of significant interest to managers, firms, regulators, and other stakeholders. It provides insights into the interplay between AEM and REM, enabling informed decisions about EM strategies under different levels of DR. Regulators can leverage this information to identify potential risk areas and develop effective regulations to mitigate EM practices that could lead to financial instability. Lenders and investors benefit from understanding how DR affects the relative use of AEM and REM, enabling them to assess financial statements and manage investment risk more accurately. The study’s findings contribute to a deeper understanding of EM dynamics and have practical implications for various stakeholders in the financial ecosystem.Furthermore, the thesis investigates EM measures during the GFC and the moderating effect of the GFC on the relationship between DR and EM. The inclusion of REM and TEM, in addition to AEM, provides a comprehensive understanding of how firms managed their earnings during the GFC, offering insights into the effectiveness and implications of different EM strategies during a financial crisis. It confirms the decline of AEM during the GFC, reinforcing existing knowledge about the impact of the crisis on EM practices. Additionally, it identifies a negative impact of the GFC on REM and TEM, providing further evidence of the challenges and changes in EM strategies faced by firms during the economic crisis. The study also finds an insignificant moderating effect of the GFC on the relationship between DR and REM, as well as DR and TEM, shedding light on EM variation across different economic stages.Overall, this thesis contributes to the EM literature by examining the non-monotonic impact of DR on EM measures, comparing different approaches to identify EM, exploring the moderating effect of DR on the relative use of AEM and REM, and investigating EM measures during the GFC. The insights from this research assist managers in decision-making, firms in adapting financial management strategies, regulators in developing policies, lenders in risk assessment, and investors in understanding the complexities and risks associated with EM. The findings have practical implications for various stakeholders in the financial realm, guiding decision-making, regulatory efforts, risk assessment, and investment strategies.Keywords: earnings management, accruals earnings management, real earnings management, default risk, global financial crisis, one-step approach, two-step approach.

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Managerial Equity Holdings and Income Smoothing Incentives

Cited by 3 publications

References 123 publications

Dividends Payout and Earnings Predictability: Evidence from a Developing Country

Dividends Payout and Earnings Predictability: Evidence from a Developing Country

The Effect of Financial Performance to Income Smoothing Practice in Property and Real Estate Companies Listed on Indonesia Stock Exchange

Earnings Management and Default Risk

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