How Well Do Different Measures of Accounting Conservatism Explain Earnings Management? PDF Download
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Author: Jonas Gut
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
The focus of this thesis is on the measurement of earnings management and in particular on the measurement of accounting conservatism. One of its main contributions is an overview showing which recent empirical studies apply which measures of conservatism, indicating the metrics' relative importance and their status among researchers. In the second part, I test three of these measures - the market-to-book ratio, nonoperating accruals, and total accruals - for their ability to explain earnings management proxied by discretionary accruals obtained from the Modified Jones Model. I find that the explanatory power of the total accruals measure is the highest, followed by the nonoperating accruals measure and the market-to-book ratio. Other results implicate that a higher level of conservatism usually has a positive (negative) influence on income-decreasing (-increasing) earnings management and that the influence of conservatism on income-decreasing earnings management is stronger than on income-increasing earnings management. Thereby, this part of my thesis links previous findings on the interaction between accounting conservatism and earnings management to several measures (or calculation modes) of the two phenomena and enables a better understanding of their functionality.
Author: Jonas Gut
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
The focus of this thesis is on the measurement of earnings management and in particular on the measurement of accounting conservatism. One of its main contributions is an overview showing which recent empirical studies apply which measures of conservatism, indicating the metrics' relative importance and their status among researchers. In the second part, I test three of these measures - the market-to-book ratio, nonoperating accruals, and total accruals - for their ability to explain earnings management proxied by discretionary accruals obtained from the Modified Jones Model. I find that the explanatory power of the total accruals measure is the highest, followed by the nonoperating accruals measure and the market-to-book ratio. Other results implicate that a higher level of conservatism usually has a positive (negative) influence on income-decreasing (-increasing) earnings management and that the influence of conservatism on income-decreasing earnings management is stronger than on income-increasing earnings management. Thereby, this part of my thesis links previous findings on the interaction between accounting conservatism and earnings management to several measures (or calculation modes) of the two phenomena and enables a better understanding of their functionality.
Author: Ralf Ewert
Publisher:
ISBN:
Category : Business & Economics
Languages : en
Pages : 142
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Book Description
Earnings Management, Conservatism, and Earnings Quality reviews and illustrates earnings management, conservatism, and their effects on earnings quality in an economic modeling framework. Both earnings management and conservative accounting introduce biases to financial reports. The fundamental issue addressed is what economic effects these biases have on earnings quality or financial reporting quality. Earnings Management, Conservatism, and Earnings Quality reviews analytical models of earnings management and conservatism and shows that both can have beneficial or detrimental economic effects, so a differentiated view is appropriate. Earnings management can provide additional information via the financial reporting communication channel, but it can also be used to misrepresent the firm's position. What the authors find is that similar to earnings management, conservatism can reduce the information content of financial reports if it suppresses relevant information, but it can be a desirable feature that improves economic efficiency. The approach to study earnings management, conservatism, and earnings quality is based on the information economics literature. A variety of analytical models are reviewed that capture the effects and subtle interactions of managers' incentives and rational expectations of users. The benefit of analytical models is to make precise these, often highly complex, strategic effects. They offer a rigorous explanation for the phenomena and show that sometimes conventional wisdom does not apply. The monograph is organized around a few basic model settings, which are presented in simple versions first and then in extensions to elicit the main insights most clearly. Chapter 2 presents the basic rational expectations equilibrium model with earnings management and rational inferences by the capital market. Chapter 3 is devoted to earnings quality and earnings quality metrics used in many studies. Chapter 4 studies conservatism in accounting. Finally, the authors examine the interaction between conservatism and earnings management. Each chapter ends with a section containing a summary of the main findings and conclusions.
Author: Ralf Ewert
Publisher:
ISBN:
Category : Business & Economics
Languages : en
Pages : 142
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Book Description
Earnings Management, Conservatism, and Earnings Quality reviews and illustrates earnings management, conservatism, and their effects on earnings quality in an economic modeling framework. Both earnings management and conservative accounting introduce biases to financial reports. The fundamental issue addressed is what economic effects these biases have on earnings quality or financial reporting quality. Earnings Management, Conservatism, and Earnings Quality reviews analytical models of earnings management and conservatism and shows that both can have beneficial or detrimental economic effects, so a differentiated view is appropriate. Earnings management can provide additional information via the financial reporting communication channel, but it can also be used to misrepresent the firm's position. What the authors find is that similar to earnings management, conservatism can reduce the information content of financial reports if it suppresses relevant information, but it can be a desirable feature that improves economic efficiency. The approach to study earnings management, conservatism, and earnings quality is based on the information economics literature. A variety of analytical models are reviewed that capture the effects and subtle interactions of managers' incentives and rational expectations of users. The benefit of analytical models is to make precise these, often highly complex, strategic effects. They offer a rigorous explanation for the phenomena and show that sometimes conventional wisdom does not apply. The monograph is organized around a few basic model settings, which are presented in simple versions first and then in extensions to elicit the main insights most clearly. Chapter 2 presents the basic rational expectations equilibrium model with earnings management and rational inferences by the capital market. Chapter 3 is devoted to earnings quality and earnings quality metrics used in many studies. Chapter 4 studies conservatism in accounting. Finally, the authors examine the interaction between conservatism and earnings management. Each chapter ends with a section containing a summary of the main findings and conclusions.
Author: Ross L. Watts
Publisher:
ISBN:
Category :
Languages : en
Pages : 39
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Book Description
This paper examines conservatism in accounting. Conservatism is defined as the differential verifiability required for recognition of profits versus losses. In its extreme form the definition incorporates the traditional conservatism adage: quot;anticipate no profit, but anticipate all losses.quot; Despite criticism from many quarters, including standard-setters, conservatism appears not only to have survived in accounting for many centuries, but also to have increased in the last 30 years.The paper lays out the various alternative explanations for conservatism: contracting; shareholder litigation; taxation and accounting regulation (e.g., SEC and FASB). It also summarizes the empirical evidence on the existence of conservatism and the extent to which it is consistent with the alternative explanations for conservatism. The evidence is consistent with both the existence of conservatism and its increase in recent years. Contracting and shareholder litigation explanations appear to be important in these results. The evidence on the effect of taxation and regulation is weaker, but is still consistent with those explanations playing a role. Earnings management could also produce some of the evidence on conservatism, but it is unlikely to be the major explanation.The explanations and evidence have important implications for accounting regulators (SEC and FASB). First, the contracting explanation implies that conservatism will exist even in the absence of formal contractual use of financial statements. As long as income and net asset measures have meaning and are used in a way that affects management's welfare, conservatism is likely to be an optimal accounting principle. Absent differential verifiability, financial measures such as income and net assets are likely to be subject to sufficient manipulation to render them meaningless. Second, recent FASB moves to apply rules such as mark-to-market without appropriate concern for verifiability are likely to be disastrous for the FASB and capital markets. Third, attempts to introduce unverifiable estimates of future cash flows into the financial statements are likely to just as disastrous.
Author: Timothy Bryan
Publisher: Dissertation Discovery Company
ISBN: 9780530008417
Category :
Languages : en
Pages : 104
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Book Description
Abstract: This paper empirically examines the relationship between conservatism and earnings management in chemical and allied products manufacturers via an analysis of the allowance for doubtful accounts and bad debt expense. Results indicate that the allowance for doubtful accounts is overstated and has become more overstated since 2004. In addition, results show that firms utilized the excessive conservatism to manage earnings to achieve earnings goals throughout the study period. An important overall inference from these results is that the traditional view of the allowance for doubtful accounts as unconditional conservatism is, in fact, conditional conservatism. Dissertation Discovery Company and Jacksonville University are dedicated to making scholarly works more discoverable and accessible throughout the world. This dissertation, "Accounting Conservatism or Earnings Management" by Timothy Gordon Bryan, was obtained from Jacksonville University and is being sold with permission from the author. The content of this dissertation has not been altered in any way. We have altered the formatting in order to facilitate the ease of printing and reading of the dissertation.
Author: Marselinus Asri
Publisher:
ISBN:
Category :
Languages : en
Pages : 31
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Book Description
The purpose research is to examine other variables that also affect the relationship between conservatism and earnings quality. Good Corporate Governance is a set of mechanisms that can protect minority shareholders from expropriation by managers and insider shareholders with an emphasis on legal mechanisms.Data Population are companies listed in Indonesia Stock Exchange during the period 2010-20015. The sample selection is based on purposive sampling method with the purpose of obtaining a representative sample. An Alternative measure of accounting conservatism used is the instrumental variables of Accounting conservatism (VIKV) developed by Lo (2005). The quality of earnings can be measured through discretionary accruals calculated by way of setting aside total accruals (TACC) and nondiscretionary accruals (NDACC). In calculating DACC, Modified Jones Model is used because it is considered better among other models to measure earnings management (Dechow et al., 1995).The results of this study indicate that the Instrumental Variables Conservatism (VIK) has a significant positive effect on the Earning Quality. This means that management positively signals the application of accounting conservatism within the company and has an impact on improving the quality of earnings. The next investor is expected to provide more valuations by providing a high premium for the company's stock price.
Author: Elisa Menicucci
Publisher: Springer Nature
ISBN: 3030367983
Category : Business & Economics
Languages : en
Pages : 154
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Book Description
This book provides an overview of earnings quality (EQ) in the context of financial reporting and offers suggestions for defining and measuring it. Although EQ has received increasing attention from investors, creditors, regulators, and researchers in different areas, there are various definitions of it and different approaches for its measurement. The book describes the relationship between EQ and earnings management (EM) since they can be considered related challenges, especially in the context of international financial reporting standards (IAS/IFRSs). EM occurs when managers make discretionary accounting choices that are regarded as either an efficient communication of private information to improve the informativeness of a firm’s current and future performance, or a distorting disclosure to mislead the firm’s true performance. The intentional manipulation of earnings by managers, within the limits allowed by the accounting standards, may alter the usefulness of financial reporting and lead to lower quality of earnings. The use of fair value in financial reporting has created a current debate about the impact it might have on EQ. At times, the high subjectivity in estimating fair value can allow opportunities for the exercise of management judgments and intentional bias, which can reduce the quality of financial reporting. Management discretion can result in high EM and hence in a reduction of EQ. Particularly during difficult financial periods, managers engage in EM to mask the negative effects of the turmoil, and in such circumstances accruals and earnings smoothing are attempts to reduce abnormal variations of earnings in such circumstances. This book is a valuable resource for those interested in wider perspectives on EQ and it adds to the research studies on this topic in the context of financial reporting.
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: Haihong He
Publisher:
ISBN:
Category :
Languages : en
Pages : 140
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Book Description
Author: Sudipta Basu
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Conservatism is interpreted to mean that accountants more frequently report current quot;bad newsquot; about future cash flows in contemporaneous earnings than current quot;good news.quot; Thus, earnings reported under GAAP should be more timely in reporting quot;bad newsquot; about future cash flows than quot;good news.quot; This paper, using the firm's stock return as a measure of news, shows that the contemporaneous association between earnings and negative returns is two to five times as large as the contemporaneous association between earnings and positive returns. It is also shown that the greater timeliness of earnings relative to cash flow measures is largely due to a greater sensitivity to concurrent negative returns. This result is consistent with accountants recording accruals conservatively. Another implication of conservatism is that negative earnings surprises are likely to be less persistent than positive earnings surprises, because earnings reports more bad news concurrently than good news, with the latter being spread over several periods. This is shown to be true empirically. It is predicted and found that earnings response coefficients are higher for positive earnings changes than for negative earnings changes, which is consistent with the market correcting for the difference in persistence in conservatively determined earnings. It is also found that the sensitivity of earnings to negative returns has more than quadrupled since 1980, while the sensitivity of earnings to negative returns has declined by two-thirds, suggesting that earnings measurement has become more conservative. Increases in accounting conservatism are found to be correlated with increases in auditor liability, but no causal inferences are drawn.
