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Author: Narasimhan Jegadeesh
Publisher:
ISBN:
Category :
Languages : en
Pages : 35
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Book Description
Earnings manipulation has become a widespread practice for US corporations. However, most studies in the literature focus on whether certain incentives would facilitate managers to manipulate earnings and there has been little evidence documenting the consequences of earnings manipulation. This paper fills this gap by examining how current accruals affect future earnings (the accrual effect) and measuring the size of this effect. We find that the aggregate future earnings will decrease by $0.046 and $0.096, respectively, in the next one and three years for a $1 increase of current accruals. Over the very long-term (25 years), 20% of current accruals will reverse. This negative accrual effect is more significant for firms with high price-earnings ratios, high market-to-book ratios and high accruals where earnings management is more likely to occur. We show that incorporating the accrual effect is useful in improving the accuracy of earnings forecasts for these firms. Accordingly, the empirical results are consistent with the notion that earnings management causes the negative relationship between current accruals and future earnings. In addition, this paper shows that one recently developed accrual model has better performance than the popularly cited model in identifying manipulated earnings.
Author: Narasimhan Jegadeesh
Publisher:
ISBN:
Category :
Languages : en
Pages : 35
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Book Description
Earnings manipulation has become a widespread practice for US corporations. However, most studies in the literature focus on whether certain incentives would facilitate managers to manipulate earnings and there has been little evidence documenting the consequences of earnings manipulation. This paper fills this gap by examining how current accruals affect future earnings (the accrual effect) and measuring the size of this effect. We find that the aggregate future earnings will decrease by $0.046 and $0.096, respectively, in the next one and three years for a $1 increase of current accruals. Over the very long-term (25 years), 20% of current accruals will reverse. This negative accrual effect is more significant for firms with high price-earnings ratios, high market-to-book ratios and high accruals where earnings management is more likely to occur. We show that incorporating the accrual effect is useful in improving the accuracy of earnings forecasts for these firms. Accordingly, the empirical results are consistent with the notion that earnings management causes the negative relationship between current accruals and future earnings. In addition, this paper shows that one recently developed accrual model has better performance than the popularly cited model in identifying manipulated earnings.
Author: Konan Chan
Publisher:
ISBN:
Category :
Languages : en
Pages : 186
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Book Description
Author: Patricia M. Fairfield
Publisher:
ISBN:
Category :
Languages : en
Pages : 32
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Book Description
An important goal of accounting research is to provide evidence that improves the analysis of financial statements for predicting future profitability. Research (Sloan 1996; Xie 2001) has found that (1) the persistence of earnings performance depends on the proportions of the cash and accrual components and that (2) a market inefficiency results from the failure of investors to fully appreciate the implications of cash flows and accruals for future earnings performance. In this study we investigate whether these results with respect to accruals can be generalized to another form of growth in net operating assets. We find that growth in long-term net operating assets, like accruals, has a negative association with one-year-ahead return on assets. We also find that the negative associations of both forms of growth (accruals and growth in long-term net operating assets) to one-year-ahead return on assets are attributable to the effect of growth on the denominator of return on assets. Furthermore, we find that the apparent market mispricing of accruals applies to growth in long-term net operating assets and that the severity of the mispricing does not significantly differ between the components of growth. Thus, the results suggest that the accrual anomaly documented in Sloan (1996) is a subset of a larger anomaly with respect to a general market mispricing of growth in net operating assets. Statement Analysis, Market Mispricing.
Author: Leonard Zacks
Publisher: John Wiley & Sons
ISBN: 1118127765
Category : Business & Economics
Languages : en
Pages : 352
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Book Description
Investment pioneer Len Zacks presents the latest academic research on how to beat the market using equity anomalies The Handbook of Equity Market Anomalies organizes and summarizes research carried out by hundreds of finance and accounting professors over the last twenty years to identify and measure equity market inefficiencies and provides self-directed individual investors with a framework for incorporating the results of this research into their own investment processes. Edited by Len Zacks, CEO of Zacks Investment Research, and written by leading professors who have performed groundbreaking research on specific anomalies, this book succinctly summarizes the most important anomalies that savvy investors have used for decades to beat the market. Some of the anomalies addressed include the accrual anomaly, net stock anomalies, fundamental anomalies, estimate revisions, changes in and levels of broker recommendations, earnings-per-share surprises, insider trading, price momentum and technical analysis, value and size anomalies, and several seasonal anomalies. This reliable resource also provides insights on how to best use the various anomalies in both market neutral and in long investor portfolios. A treasure trove of investment research and wisdom, the book will save you literally thousands of hours by distilling the essence of twenty years of academic research into eleven clear chapters and providing the framework and conviction to develop market-beating strategies. Strips the academic jargon from the research and highlights the actual returns generated by the anomalies, and documented in the academic literature Provides a theoretical framework within which to understand the concepts of risk adjusted returns and market inefficiencies Anomalies are selected by Len Zacks, a pioneer in the field of investing As the founder of Zacks Investment Research, Len Zacks pioneered the concept of the earnings-per-share surprise in 1982 and developed the Zacks Rank, one of the first anomaly-based stock selection tools. Today, his firm manages U.S. equities for individual and institutional investors and provides investment software and investment data to all types of investors. Now, with his new book, he shows you what it takes to build a quant process to outperform an index based on academically documented market inefficiencies and anomalies.
Author: Messod D. Beneish
Publisher:
ISBN:
Category :
Languages : en
Pages : 60
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Book Description
The paper examines the relation between the probability of manipulation, accruals, and future returns. We show that firms that have a high likelihood of earnings manipulation (as measured by the Beneish (1999)'s M-Score) experience lower future earnings, but that investors expect these firms to have higher future earnings. Indeed, we find that investors overestimate next-period return on assets by 490 to 690 basis points (this is significant as the median ROA in the sample 4.6%). We also show that the probability of manipulation is a correlated omitted variable for the earnings forecasting models used in prior research on accrual mispricing and that including the probability of manipulation greatly attenuates the mispricing of accrual persistence. Finally, we show that the probability of earnings manipulation predicts economically significant abnormal returns of approximately 15% per year after controlling for accruals and various controls for risk factors, including a factor compensating for earnings quality differences (Easley and O'Hara (2004), Francis et al. (2005)). We interpret our results that the predictive ability of accruals for returns is greatly diminished in the presence of the M-Score as indicating that accrual mispricing arises because investors are misled by managers' opportunistic management of earnings.
Author:
Publisher: GRIN Verlag
ISBN: 3964875953
Category : Business & Economics
Languages : en
Pages : 81
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Book Description
Master's Thesis from the year 2019 in the subject Business economics - Accounting and Taxes, University of Duisburg-Essen, course: Master Thesis, language: English, abstract: This paper delves into various theories and approaches, aiming to define and differentiate earnings management from related concepts such as fraud, expectation management, and impression management. It explores the goals and incentives driving earnings management, including maximizing or minimizing earnings, beating targets, and smoothing. At the onset of the new millennium, corporate scandals rocked the business world, eroding trust in management, boards of directors, and the accounting profession. In response, regulations and policies aimed at enhancing corporate governance and financial reporting were swiftly implemented. The credibility, clarity, and consistency of financial reporting practices play a pivotal role in enabling investors to make informed decisions. Accurate and fair financial performance representations, as opposed to inflated and misleading figures, are essential for market players, including shareholders and creditors. Investors rely on audited financial reports to guide their investment decisions, underscoring the critical importance of accuracy and reliability in publicly available financial disclosures. Auditors, by reducing the risk of material misstatement, ensure the integrity of the information disclosed in a company's financial statements. Management, with the goal of achieving promised targets and ensuring the company's existence, may engage in earnings management as a strategic contribution to corporate policy. Financial reporting serves as a means to distinguish well-performing companies from their counterparts, facilitating efficient resource allocation and empowering stakeholders to make effective decisions. The disclosed earnings results significantly impact a firm's overall business activities and management decisions, particularly in satisfying analysts' expectations, which can influence equity value. While accounting standards play a role, the quality of financial statements is more influenced by company-specific and institutional factors shaping managers' incentives. These factors lead to financial reporting practices being viewed as the outcome of a cost-benefit assessment.
Author: Leonidas C. Doukakis
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
On the basis of an accrual decomposition into two components capturing output growth and accounting distortions, this paper analyzes the effects of accounting accruals on firms' future performance in the U.K. stock market. Findings reveal a strong negative association of accruals with future profitability and stock returns. The effect of accruals on future earnings performance is driven only by the component attributable to accounting distortions, and the accrual effect on stock price performance is driven by both the component attributable to accounting distortions and the component attributable to growth. These two components complement each other in driving the accrual effect on stock returns.
Author: Sanjay Wikash Bissessur
Publisher: Rozenberg Publishers
ISBN: 9051709870
Category :
Languages : en
Pages : 217
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Book Description
Author: Brett J. Govendir
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
In this paper we categorise accruals on the basis of how they are generated, and empirically evaluate whether this categorisation provides additional insights into future earnings and is relevant to the estimation of firm value. Specifically, we categorise accruals on the basis of whether the underlying cash flows lead or lag earnings recognition, and whether the accruals are initiating or reversing (i.e. a four-way categorisation). We demonstrate that these accrual categories are not homogeneous, have differing implications for earnings persistence and are relevant for firm valuation. Significantly, where cash flows lag earnings recognition (e.g. sales made on credit) they have greater implications for future earnings than where cash flows lead earnings (e.g. unearned revenues) and depreciation. Similarly, initiating accruals have greater implications for the persistence of earnings than reversing accruals. Paradoxically, while depreciation exhibits high persistence, it has less of an implication for the persistence of earnings than either lag or initiating earnings categories. These findings enhance our understanding of the properties of accounting income and how it is impounded into share prices.
Author: Patricia M. Fairfield
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Prior research reveals that the accrual component of profitability is less persistent than the cash flow component, and that investors fail to fully appreciate their differing implications for future profitability (Sloan 1996). However, accruals are a component of growth in net operating assets as well as a component of profitability. Just as we can disaggregate profitability into accruals and cash flows from operations, we can disaggregate growth in net operating assets into accruals and growth in long-term net operating assets. We find, after controlling for current profitability, that both components of growth in net operating assets - accruals and growth in long-term net operating assets - have equivalent negative associations with one-year-ahead return on assets. This result is consistent with conservative accounting and diminishing marginal returns on investments. We also find, after controlling for current profitability, that the market appears to equivalently overvalue accruals and growth in long-term net operating assets relative to their association with one-year-ahead ROA. Our evidence suggests that the accrual anomaly documented in Sloan (1996) is a special case of what could be viewed as a more general growth anomaly.
