Overvalued equity, benchmark beating and unexpected accruals

Coulton, Jeff; Saune, Naibuka; Taylor, Stephen L.

doi:10.1111/acfi.12077

Cited by 7 publications

(3 citation statements)

References 44 publications

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“…While Holland and Ramsay (2003) find that small increases in profits and small profits around earnings thresholds are consistent with a signalling explanation, Coulton et al (2005) caution against interpreting discontinuities around null earnings and unexpected accruals as measures of earnings management. However, more recently, Coulton et al (2014) find that where the incentive for manipulation is most likely, that is, for overvalued firms that benchmark beat, there are higher unexpected accruals.…”

Section: Relevance To Practicementioning

confidence: 99%

A review of accounting research in the Asia Pacific region

Benson

Clarkson

Smith

et al. 2015

Australian Journal of Management

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In this paper, we review scholarly accounting research published within the Asia Pacific Region by analysing nine of the main accounting journals within the region along five dimensions. The nine journals we focus on are: Accounting, Auditing and Accountability Journal; Australian Accounting Review; Abacus; Accounting and Finance; Australian Journal of Management; Accounting Research Journal; Journal of Contemporary Accounting and Economics; Managerial Auditing Journal; and Pacific Accounting Review. The five dimensions we consider are: the most frequently cited papers; topical coverage; impact on practice; research method; and noted authors. Our review leads us to conclude that the accounting journals published within the Asia Pacific region make a significant contribution to research and practice both within the region and internationally.

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Section: Relevance To Practicementioning

confidence: 99%

A review of accounting research in the Asia Pacific region

Benson

Clarkson

Smith

et al. 2015

Australian Journal of Management

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“…Another stream of literature documents discontinuities in earnings distribution at various benchmarks such as zero earnings, prior earnings, analyst forecasts and rounded numbers (Burgstahler and Dichev, 1997; Degeorge et al , 1999; Carvajal et al , 2015; Coulton et al , 2015; Kent and Routledge, 2015; Thomas, 1989; Yang and Dong, 2015; Wang et al , 2010; Lee and Choi, 2016). Debate is still going on as to the causes of the discontinuities.…”

Section: Institutional Background Literature Review and Hypotheses Developmentmentioning

confidence: 99%

The spillover effects of a bright-line regulation: evidence from China

Song

Zhou

2019

IJAIM

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Purpose The purpose of this paper is to investigate the spillover effects of a bright-line disclosure regulation that required Chinese listed firms to provide earnings forecasts if they anticipated specified, large earnings changes. Design/methodology/approach The paper examines the discontinuity of the earnings change distribution of firms listed on the Shenzhen Stock Market between 2010 and 2014. The paper finds that firms no longer subject to the bright-line test still exhibited discontinuity in earnings change distribution. The discontinuity lasted for at least three years with magnitude comparable to that of the firms still subject to the bright-line test. In addition, newly listed firms that had never experienced the bright-line test showed similar tendency to avoid the same threshold. There is some evidence that these firms’ avoidance of the −50 per cent changes was partly because of market pressure. Research limitations/implications Research on bright-line tests has to date focused on their immediate and direct effects on firms currently subject to such tests. This study finds that a bright-line disclosure regulation’s influence is not limited to the firms directly governed by the regulation. It could lead to widespread and long lasting distortions in financial reporting behaviors of firms not currently subject to such tests. Practical implications The paper has implications for regulators who study the economic consequences of bright-line regulations in general and analysts of the Chinese capital market in particular. Originality/value This is the first empirical report that bright-line disclosure regulations affected the financial reporting behavior of firms that were not directly subject to the bright-line tests.

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“…Dechow and Skinner () defined accruals management as accounting choices under GAAP that try to obscure true economic performance that does not have any direct cash flow consequences. Earnings management has also been documented based on type of the firm (distressed or healthy) (Charitou, Lambertides, & Trigeorgis, ), subject to price control regulation (Bowman & Navissi, ), change of CEO and CEO/CFO characteristics (Amir, Kallunki, & Nilsson, ; Choi, Kwak, & Choe, ; Godfrey, Mather, & Ramsay, ; Hossain & Monroe, ), and overvalued equity (Coulton, Saune, & Taylor, ). The literature on earnings management/earnings quality is vast (see Benson et al, ; Benson et al, ), and it also encompasses corporate governance (see Brown et al, for a detailed survey; Hassan, for role of AC vs. VC on corporate governance reform); hence, the focus in this article is primarily on real earnings management.…”

Section: Literature Reviewmentioning

confidence: 99%

Inference of economic truth from financial statements for detecting earnings management: inventory costing methods from an information economics perspective

Herath

2017

Manage Decis Econ

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We introduce uncertainty in the classic inventory costing choice problem to investigate the underlying partitions imposed by two accounting inquiries (processes of generating information):variable costing and absorption costing. In a contemporaneous reporting environment, we show that absorption costing provides a finer partition of the state space compared to variable costing when a firm arbitrarily increases the production level (opportunistic overproduction), and the predetermined fixed overhead rate is adjusted. Grounded in an information economics perspective, the intent of the article is to propose an approach to detect real earnings management by extracting information from financial statements. The resulting managerial biases arising from earnings management are also discussed. | INTRODUCTIONHow accounting as an information system can convey information is the focus of accounting research in information economics. More specifically, attempts to understand how much and what information is conveyed are the prime objective. In this regard, ranking of information systems is an important topic within information economics. The design of accounting information systems is a complex task. Nevertheless, in this article, we consider a specific subproblem, the classic inventory costing choice problem of absorption costing verses variable costing to understand how the choice of an accounting method changes the characteristic of the accounting system. The overarching theme of the article is to raise awareness that accounting is an information science.Fellingham (2015) adopts the view that accounting is an information science, and he uses carefully crafted information theorems to show that double entry systems are distinct and a valuable contribution to information science. He refers to the mutual information theorem as the fundamental theorem of accounting and shows that it establishes the operational equivalence of accounting and information science. Consequently, as Fellingham (2015) illustrates, accounting appears on the dollar side of the theorem's equality, and probabilities and information science appear on the other side. Within an information science paradigm, Arya, Fellingham, Glover, and Sivaramakrishnan (2000) explore the connection between information system design and the level of managerial slack during capital project implementation.More specifically, in line with Fellingham (2015) and Arya et al. (2000), the objective of this article is the inference of economic truth of economic transactions from financial statements. Hence, we propose the following research question. Is there a way to detect real earnings management by extracting information from financial statements? More specifically, if one is able to compare two accounting inquiries (the process of generating information) such as variable costing (VC) and absorption costing (AC) from an information economics perspective, which accounting inquiry would reveal a manager engaging in opportunistic production to boost earnings?

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Overvalued equity, benchmark beating and unexpected accruals

Cited by 7 publications

References 44 publications

A review of accounting research in the Asia Pacific region

A review of accounting research in the Asia Pacific region

The spillover effects of a bright-line regulation: evidence from China

Inference of economic truth from financial statements for detecting earnings management: inventory costing methods from an information economics perspective

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