Managing Earnings with Intercorporate Investments

Abstract

We explore to what extent firms deliberately manage their financial reports by exploiting the flexibility of generally accepted accounting principles. Using a sample of Oslo Stock Exchange-listed firms with 20-50% equity holdings in other firms, we find that firms with high financial leverage tend to maximize reported earnings from these investments through their choice between the cost method and the equity method, possibly in an attempt to reduce debt renegotiation costs or to avoid regulatory attention. In contrast, managers do not systematically bias reported earnings to extract private benefits or to signal revised expectations about future cash flows. Firms use different earnings management tools in a consistent way, as the earnings effect of the cost/equity choice is not offset by discretionary accruals. Copyright 2006 The Authors Journal compilation (c) 2006 Blackwell Publishing Ltd.

Career Concerns and Earnings Management

“…2 Most of the extant academic literature links the incentives for both real and accruals based earnings management, directly or indirectly, to explicit contracts. 3 While explicit contracting-based incentives undoubtedly play an important role, the literature has been almost silent about the effects of implicit contracts and implicit incentives over earnings management 4 even though a recent survey by Graham, Harvey and Rajgopal (2005) documents that more than three quarters of responding executives consider upward mobility in the labor market (i.e., an implicit career incentive) to be more important than short-run current compensation benefits in influencing their earnings management decisions. 5 Our study addresses the apparent disconnect between this survey evidence regarding the importance of implicit contracts and the extant literature's focus on explicit contracting explanations, by presenting a model of earnings management that builds upon the seminal career concerns work of Holmstrom (1982Holmstrom ( , 1999.…”

“…3 Contracting-based motives for earnings management that have been examined include executive current cash bonus maximization (Healy 1985), the avoidance of debt covenant violations (Defond and Jiambalvo 1994), more favorable equity and bond pricing (Teoh, Welch and Wong 1998a and 1998b; Aharony, Wang and Yuan 2010; Higgins 2013), the reduction of debt renegotiation costs (Bohren and Haug 2006), political cost considerations (Key 1997;Patten and Trompeter 2003), and executive equity compensation (Cheng and Warfield 2005). 4 One exception is the study by Bowen, DuCharme and Shores (1995).…”

Why Do Companies From Emerging Countries Manage Earnings?

“…Burgstahler and Eames (2003) obtain evidence of downward forecast management to achieve zero and small positive earnings surprises easily. Additionally, Bohren and Haug (2006) confirm that firms take into account their concern about visibility. They explain that companies may decrease rather than increase their earnings in connection to the firm's visibility.…”

Determinantes de la discrecionalidad directiva en la elección del método contable de las participaciones en negocios conjuntos

“…Estos resultados permiten confi rmar la hipótesis H3, que las empresas con mayor endeudamiento son menos proclives a utilizar IP. Estos resultados son consistentes con los de Mora y Rees (1996, Morris y Gordon (2006) y Bohren y Haug (2006).…”

“…Esta hipótesis ha sido frecuentemente considerada en los trabajos sobre elección del método contable para las asociadas, PE en lugar de coste (Mazay et al, 1993;Zimmer, 1994;Morris y Gordon, 2006;Bohren y Haug, 2006). En todos ellos, a excepción de Mazay et al (1993), el endeudamiento es un aspecto clave en la decisión.…”