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Author: Günter Strobl
Publisher:
ISBN:
Category :
Languages : en
Pages : 31
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Book Description
The widespread use of accounting information by investors and financial analysts to help value stocks creates an incentive for managers to manipulate earnings in an attempt to influence short-term stock price performance. This paper examines the role of earnings management in affecting a firm's cost of capital. Using an agency model with multiple firms whose cash flows are correlated, we demonstrate that the extent of earnings manipulation varies across the business cycle. Managers are more inclined to engage in manipulation during periods of economic expansion. Because of this dependence on the state of the economy, earnings manipulation influences a firm's cost of capital despite the forces of diversification. In particular, we find that manipulation reduces the correlation between the firms' cash flows and thus lowers the risk premium required by investors.
Author: Günter Strobl
Publisher:
ISBN:
Category :
Languages : en
Pages : 31
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Book Description
The widespread use of accounting information by investors and financial analysts to help value stocks creates an incentive for managers to manipulate earnings in an attempt to influence short-term stock price performance. This paper examines the role of earnings management in affecting a firm's cost of capital. Using an agency model with multiple firms whose cash flows are correlated, we demonstrate that the extent of earnings manipulation varies across the business cycle. Managers are more inclined to engage in manipulation during periods of economic expansion. Because of this dependence on the state of the economy, earnings manipulation influences a firm's cost of capital despite the forces of diversification. In particular, we find that manipulation reduces the correlation between the firms' cash flows and thus lowers the risk premium required by investors.
Author: Jeremy Bertomeu
Publisher:
ISBN:
Category :
Languages : en
Pages : 23
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Book Description
This article develops further results on earnings management and the cost of capital, which complement Strobl (Journal of Accounting Research, forth.). Within a simplified version of the model, I illustrate the existing linkage between earning management activities and firms' cost of capital, even if the individual fraud risk is diversifiable. I identify plausible conditions under which the cost of capital will increase with more earnings management and show that the level of managerial ownership and enforcement are important testable determinants of this association. Lastly, I argue that, in the absence of an observable aggregate wealth portfolio, whether accounting quality is informative on firms' beta or a separate risk factor are observationally equivalent propositions. I then show that an aggregate accounting quality measure would provide information about expected returns.
Author: Aasmund Eilifsen
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
We show that if taxable income were linked to accounting income, there will exist an automatic safeguard against manipulation of earnings within the analyzed framework. Separating taxable income from accounting income will remove this self-controlled mechanism, and accordingly create a need for separate countermeasures to prevent earnings manipulation.
Author: Jeong-Bon Kim
Publisher:
ISBN:
Category :
Languages : en
Pages : 50
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Book Description
This study investigates whether a firm's cost of equity capital is influenced by the extent of a firm's real activities management. Using a large sample of U.S. firms, we find that our proxy for the cost of capital is positively associated with the extent of earnings management through the real activities manipulation after controlling for the effect of the accrual-based earnings management. We also provide evidence suggesting that this positive association stems from managerial opportunism rather than from the measurement errors in our real earnings management proxies. The main findings are robust to a battery of sensitivity tests. Collectively, our results suggest that real earnings management activities exacerbate the information quality of earnings used by outside investors, and thus the market demands a higher risk premium for these activities, which is incremental to the risk premium for the accrual-based 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: Malek El Diri
Publisher: Springer
ISBN: 3319626868
Category : Business & Economics
Languages : en
Pages : 120
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Book Description
This book provides researchers and scholars with a comprehensive and up-to-date analysis of earnings management theory and literature. While it raises new questions for future research, the book can be also helpful to other parties who rely on financial reporting in making decisions like regulators, policy makers, shareholders, investors, and gatekeepers e.g., auditors and analysts. The book summarizes the existing literature and provides insight into new areas of research such as the differences between earnings management, fraud, earnings quality, impression management, and expectation management; the trade-off between earnings management activities; the special measures of earnings management; and the classification of earnings management motives based on a comprehensive theoretical framework.
Author: Bianca Ahrens
Publisher: BoD – Books on Demand
ISBN: 3899369211
Category : Business & Economics
Languages : en
Pages : 282
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Book Description
In his speech from 1998 the former chairman of the United States Securities and Exchange Commission (SEC) Arthur Levitt pointed out that trust "is the bedrock of our capital markets" and that this must not be shaken by the erosion of earnings quality. He made clear that it is the challenge of the whole financial community to counteract such a development. This thesis deals with the question whether the importance of earnings for the capital market varies with its quality. The question arises, because in recent years a large number of firm scandals has shaken the trust in the reliability of reported earnings. In order to properly address the research questions, the literature on earnings quality definitions, quality measures as well as implications of earnings quality on capital markets is reviewed and critically discussed. The author investigates whether well known results concerning capital market implications of earnings quality remain stable for all measures considered. She answers the question of how earnings quality affects firm value, cost of equity capital, and the accuracy of analysts' forecasts taking into account the effects of determinants of earnings quality.
Author: Jennifer Francis
Publisher: Now Publishers Inc
ISBN: 1601981147
Category : Business & Economics
Languages : en
Pages : 97
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Book Description
This review lays out a research perspective on earnings quality. We provide an overview of alternative definitions and measures of earnings quality and a discussion of research design choices encountered in earnings quality research. Throughout, we focus on a capital markets setting, as opposed, for example, to a contracting or stewardship setting. Our reason for this choice stems from the view that the capital market uses of accounting information are fundamental, in the sense of providing a basis for other uses, such as stewardship. Because resource allocations are ex ante decisions while contracting/stewardship assessments are ex post evaluations of outcomes, evidence on whether, how and to what degree earnings quality influences capital market resource allocation decisions is fundamental to understanding why and how accounting matters to investors and others, including those charged with stewardship responsibilities. Demonstrating a link between earnings quality and, for example, the costs of equity and debt capital implies a basic economic role in capital allocation decisions for accounting information; this role has only recently been documented in the accounting literature. We focus on how the precision of financial information in capturing one or more underlying valuation-relevant constructs affects the assessment and use of that information by capital market participants. We emphasize that the choice of constructs to be measured is typically contextual. Our main focus is on the precision of earnings, which we view as a summary indicator of the overall quality of financial reporting. Our intent in discussing research that evaluates the capital market effects of earnings quality is both to stimulate further research in this area and to encourage research on related topics, including, for example, the role of earnings quality in contracting and stewardship.
Author: Uptal Bhattacharya
Publisher:
ISBN: 9789616430258
Category :
Languages : en
Pages : 27
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Book Description
Author: Payam Mojtahedi
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
The accounting scientific literature pays much attention focusing on the incentives of the use of earnings management. The purpose of this study is to explore the relationship between Earning management and cost of equity capital in 150 Malaysian firms over the period 2000-2011. The main objective of this research is that whether or not firms manage earnings to profit from a lower cost of capital. The library method is used for gathering information and the method of multiple regressions has been used to predict this relation. To determine cost of equity growth (Gordon) model has been used, and adjusted model of Jones has been used to determine of earning management. Debt to equity ratio, firm size and return on equity were used as control variable. In general, findings from the empirical analysis indicate that the relationships between cost of equity and earning management was inverse but weak, and all control variable have significant relation with cost of equity except return on equity.
