Abstract
This paper analyses the association between earnings management and value relevance of accounting information, for a number of 556 observations from a sample of 65 companies listed on the Bucharest Stock Exchange during a 10 year period: 2006-2015. Sampled companies are classified according to the method used for the reporting of operating cash flows. Findings confirm that entities using the indirect method have a higher level of discretionary accruals and are more tempted to opportunistically increase their earnings. As far as value relevance is concerned, results show that participants on the Romanian capital market place more weight on the information reported by entities experiencing higher levels of discretionary accruals.
Highlights
The common saying “information is power” is more accurate than ever in the current economic environment
In Romania, Filip and Raffournier (2010) document a low quality of earnings reported by listed companies while Mironiuc and Huian (2016) show that other comprehensive income is value relevant. In this context, considering discretionary accruals as a proxy that captures the existence of earnings management (EM) strategies and stock market price as a function of earnings and book value, we develop the following hypothesis: H2: Value relevance of accounting information is reduced in the presence of EM techniques at entities using the indirect cash flows from operations (CFO) reporting method
Pit - stock market price of the firm i, 3 months after annual financial statements are released for year t; Earnings per share (EPS) - earnings per share; dDA - a dummy variable that takes the value 1 if the company has high levels of discretionary accruals, i.e. use the indirect CFO method; BV - book value per share; DA - discretionary accruals
Summary
The common saying “information is power” is more accurate than ever in the current economic environment. The quality of information contained in these financial reports influences the quality of current decisions, the perspective of making decisions and, implicitly, the results obtained after the decisions are made. A central topic of the economic research dealing with accounting quality is the extent to which managers modify the reported earnings for their own benefit (Beneish, 2001). As accounting rules allow alternatives, estimates and judgments, managers have a degree of flexibility in choosing the reporting solution best suited to the entity or their interests, without breaching any legal regulations. This technique, called earnings management (EM), has been a long-debated topic. Financial statements are considered transparent only when interested parties have access to all relevant information [...] in a timely manner (Vladu, Amat and Cuzdriorean, 2014)
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