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Author: Ahsan Habib
Publisher:
ISBN:
Category :
Languages : en
Pages : 31
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Book Description
Abstract: This paper synthesises a new strand of earnings management research that uses distribution of reported earnings to detect earnings management instead of using discretionary accruals (DACCR), the conventional proxy for earnings management. The theoretical foundation for benchmark beating approach is derived from the 'prospect theory' developed by Kahneman and Tversky (1979) which shows that losses are more displeasing than the equivalent gain when evaluated from a particular reference point. Three such reference points are identified in the 'benchmark beating' literature, namely (i) avoiding losses; (ii) reporting small increase in earnings; and (iii) meeting or just beating analyst forecasts. Review of the empirical literature shows that there is an unusual discontinuity around zero for earnings level, earnings change and analyst forecasts than expected. Managers use available flexibilities under GAPP like deferred tax expense, tax expense, stock repurchase, restructuring charge reversals etc. to manage earnings for the purpose of achieving earnings thresholds. Research shows that stock-based compensation packages offered to managers is an important motivation for managers to engage in meeting or beating earnings thresholds. However, corporate governance mechanism like shareholder protection constrains managerial ability to meet or beat benchmark. Limitations of 'benchmark beating' literature for standard-setters are identified and some future research directions are provided.
Author: Ahsan Habib
Publisher:
ISBN:
Category :
Languages : en
Pages : 31
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Book Description
Abstract: This paper synthesises a new strand of earnings management research that uses distribution of reported earnings to detect earnings management instead of using discretionary accruals (DACCR), the conventional proxy for earnings management. The theoretical foundation for benchmark beating approach is derived from the 'prospect theory' developed by Kahneman and Tversky (1979) which shows that losses are more displeasing than the equivalent gain when evaluated from a particular reference point. Three such reference points are identified in the 'benchmark beating' literature, namely (i) avoiding losses; (ii) reporting small increase in earnings; and (iii) meeting or just beating analyst forecasts. Review of the empirical literature shows that there is an unusual discontinuity around zero for earnings level, earnings change and analyst forecasts than expected. Managers use available flexibilities under GAPP like deferred tax expense, tax expense, stock repurchase, restructuring charge reversals etc. to manage earnings for the purpose of achieving earnings thresholds. Research shows that stock-based compensation packages offered to managers is an important motivation for managers to engage in meeting or beating earnings thresholds. However, corporate governance mechanism like shareholder protection constrains managerial ability to meet or beat benchmark. Limitations of 'benchmark beating' literature for standard-setters are identified and some future research directions are provided.
Author: Naibuka Uluilakeba Saune
Publisher:
ISBN:
Category : Benchmarking (Management)
Languages : en
Pages : 328
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Book Description
Author: Brooke Beyer
Publisher:
ISBN:
Category :
Languages : en
Pages : 54
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Book Description
Prior studies document both an improvement and deterioration in the future operating performance of firms engaging in real earnings management (REM) to meet earnings benchmarks. These results suggest that some firms use REM to signal their favorable prospects, whereas others use REM opportunistically. We hypothesize that firms with less robust information environments, more costly REM, and fewer incentives to meet short-term earnings benchmarks are more likely to engage in REM to signal future performance. Consistent with expectations, we find the positive relation between REM and future profitability is limited to firms that have less robust information environments (measured with stock return volatility, bid/ask spread, and analysts following), more costly REM (measured with market share and financial health), and fewer incentives to meet short-term earnings benchmarks (measured with market-to-book ratio, transient investors, and seasoned equity offering). In supplementary analysis, we note that Bhojraj et al. (2009) restrict their sample to relatively large firms, whereas Gunny's (2010) sample includes both large and small firms. Our analysis indicates that the difference in sample composition explains the differing results. We find that small firms use REM to signal positive future performance, but large firms do not.
Author: Jeffrey Coulton
Publisher:
ISBN:
Category :
Languages : en
Pages : 42
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Book Description
We investigate the extent to which the overvaluation hypothesis provides incentives for managers to beat earnings benchmarks, and whether this benchmark beating can be reliably interpreted as evidence of earnings management. We carefully identify firms immediately above earnings benchmarks that have, a priori, overvaluation-based incentives to achieve the benchmark. We therefore focus on benchmark-beating observations where manipulation is most likely, providing a more powerful test of the existence of opportunistic financial reporting. Consistent with overvaluation-related incentives encouraging earnings management, we find that overvalued firms that just exceed levels-related earnings benchmarks have higher unexpected accruals than firms with less extreme valuations.
Author: John (Xuefeng) Jiang
Publisher:
ISBN:
Category :
Languages : en
Pages : 50
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Book Description
Prior research documents that firms tend to beat three earnings benchmarks: zero earnings, last year's earnings, and analyst's forecasted earnings, and that there are both equity market and compensation-related benefits associated with beating these benchmarks. This study investigates whether and under what conditions beating these three earnings benchmarks reduces a firm's cost of debt. I use two proxies for a firm's cost of debt: credit ratings and initial bond yield spread. Results suggest that firms beating earnings benchmarks have a higher probability of rating upgrades and a smaller initial bond yield spread. Additional analyses indicate that (i) the benefits of beating earnings benchmarks are more pronounced for firms with high default risk; (ii) beating the zero earnings benchmark generally provides the biggest reward in terms of a lower cost of debt; and (iii) the reduction in the cost of debt is attenuated but does not disappear for firms beating benchmarks through earnings management. In sum, results suggest that there are benefits associated with beating earnings benchmarks in the debt market. These benefits vary by benchmark, firm default risk, and method utilized to beat the benchmark. Among other implications, this evidence suggests that the relative importance of specific benchmarks differs across the equity and bond markets.
Author: Amy Yunzhi Zang
Publisher: ProQuest
ISBN: 9780549163251
Category :
Languages : en
Pages : 120
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Book Description
Author: Andrew Alexei Acito
Publisher:
ISBN:
Category : Corporate profits
Languages : en
Pages : 60
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Book Description
This study adds to the earnings guidance debate by investigating whether quarterly guidance is related to two forms of earnings management: (1) benchmark beating and (2) accounting irregularities. Using a post-Regulation Fair Disclosure sample, I find that firms regularly issuing earnings guidance display a discontinuity around zero in their distribution of management forecast errors and a larger discontinuity in their distribution of analyst forecast errors compared to non-guiding firms. Multivariate tests reveal that guiding firms recognize large abnormal accruals to beat their own guidance, but not to beat analyst forecasts, whereas non-guiding firms do recognize large abnormal accruals to beat analyst forecasts. Overall, guiding firms and non-guiding firms use similar levels of abnormal accruals to beat benchmarks. I also find no statistical relation between quarterly guidance and the likelihood of accounting irregularities. In sum, the evidence shows that while guiding firms and non-guiding firms manage earnings to different benchmarks, they are similar in terms of their aggregate earnings management.
Author: Joshua Ronen
Publisher: Springer Science & Business Media
ISBN: 0387257713
Category : Business & Economics
Languages : en
Pages : 587
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Book Description
This book is a study of earnings management, aimed at scholars and professionals in accounting, finance, economics, and law. The authors address research questions including: Why are earnings so important that firms feel compelled to manipulate them? What set of circumstances will induce earnings management? How will the interaction among management, boards of directors, investors, employees, suppliers, customers and regulators affect earnings management? How to design empirical research addressing earnings management? What are the limitations and strengths of current empirical models?
Author: Basiem Al-Shattarat
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Author: Weihong Xu
Publisher:
ISBN:
Category :
Languages : en
Pages : 39
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Book Description
This study examines whether firms engage in accruals management to beat zero earnings benchmark from the perspective of earnings per share (EPS). Based on net income scaled by lagged market value of equity (E/MV) to define just-miss and just-beat test bins, previous studies provide no or inconclusive evidence of accruals management to beat the zero earnings benchmark. I conjecture that because managers focus on shares scaled earnings performance rather than market value scaled earnings performance, forming test bins based on EPS instead of E/MV is a better approach to detect accruals management. As expected, I find evidence of accruals management to beat the zero EPS benchmark. I also find that firms are more likely to manipulate accruals when managers have stronger incentives to beat the zero EPS benchmark. In addition, accruals of firms just beating the zero EPS benchmark more likely reverse next year and result in relatively lower future earnings for firms just beating the benchmark compared with firms just missing the benchmark.
