Abstract
Prior studies examined the effect of corporate governance variables on discretionary current accrual, the most widely used measurement of earnings management. The principal-agent conflict implies that the size of the board, the percent of independent directors, CEO duality, and auditor prestige limit discretionary current accruals (DCA). This paper extends past studies by examining the effect of ownership structure on discretionary current accruals. The study determines the level of income-increasing earnings management of initial public offerings (IPOs) in the Philippines and the factors that explain it. Particularly, the paper examines the effect of ownership concentration and largest shareholder ownership on discretionary current accruals. The study uses a final sample of 105 IPO firms in Philippine Stock Exchange (PSE) from 2008 to 2018. Employing the modified Jones’s (1991) model to measure discretionary current accrual and multiple regression analysis, the study finds -4.19% discretionary current accrual on the average. It also reveals that the 2002 Philippine Code of Corporate Governance (PCCG) is ineffective in curbing earnings management. In addition, there is an insignificant relationship between the size of the board, CEO duality, ownership concentration, largest shareholder ownership and auditor prestige, and earnings management. Furthermore, the paper finds a significant relationship between the percent of independent directors, industry sector, return on assets (ROA) and cash flow from operations and earnings management.
Highlights
Earnings management by firms going public is well studied in finance and accounting literature
This paper extends past studies by examining the effect of ownership structure on discretionary current accruals
One possible reason for the negative discretionary current accruals (DCA) result is that, unlike most studies where DCA is computed using two-year financial statements including the year of the initial public offerings (IPOs) following Teoh et al (1998a), this study uses complete financial statements data of the previous two years leading to the IPO year
Summary
Earnings management by firms going public is well studied in finance and accounting literature. Teoh, Welch, and Wong (1998a) documented earnings management in the US during the initial public offerings (IPOs) year using 1,649 IPO firms during 1980–1992. In the US, Friedlan (1994) conducted a study using 277 samples covering the period 1981–1984 and he found that firms going public managed the financial statements prior to the IPO by adjusting the discretionary current accruals (DCA) upwards leading to higher earnings. Roosenboom, van der Goot, and Mertens (2003) documented earnings management in the Netherlands with 68 samples during the IPO year but not prior to the offering. Tykvová (2006) reported earnings management in Germany with 250 IPOs for the period 1999–2000. Contrary findings are reported by others. Aharony, Lin, and Loeb (1993) examined 229 IPO firms for the period 1985–1987 and found very weak support for earnings manipulation. Ball and Shivakumar (2008) likewise proved that IPO firms reported more conservatively using 394 samples in the UK during 1992–1999
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
