Discretionary Current Accruals Research Articles

Influence of Company Characteristics on Earnings Management in Group Affiliated and Standalone Firms: Evidence from India

The study investigates the influence of company-specific characteristics, such as firm age, firm size, performance, leverage, capital intensity ratio, and assets growth, on earnings management. The study also examines the influence of such characteristics on earnings management in group-affiliated and standalone firms. The final sample consists of 248 companies listed on the Bombay Stock Exchange. The research takes place from 2012–2013 to 2018–2019. Signed discretionary accruals and signed discretionary current accruals are used as proxies for measuring earnings management. The findings show that the firm’s age, performance, and leverage are all positively associated with signed discretionary accruals. However, the capital intensity ratio has a negative relationship. Further, group firms are less likely to indulge in earnings management practices as compared with standalone firms. Also, the firm age and performance have positive relation, and capital intensity ratio has negative relation with signed discretionary accruals for group firms. In the case of standalone firms, firm size, performance, and leverage have a positive association whereas capital intensity has a negative association. The results of the present study give insight to financial analysts, regulators, investment analysts, credit rating agencies, etc., to keep an eye on manipulative reporting practices done by companies of different characteristics and ownership attribute.

Audit Quality, Institutional Environments, and Earnings Management: An Empirical Analysis of New Listings

The purpose of this article is to investigate the relationship between audit quality, the role of institutional environments at the provincial level, and earnings management around listing events by using data from 189 newly-listed companies on the Hochiminh Stock Exchange. Audit quality was proxied by Big4, auditor tenure, and auditor industry specialization, while earnings management was quantified as current discretionary accruals. The findings indicated that there was no role for Big 4, auditor tenure, and auditor industry specialization in curbing earnings management, as indicated by the regression result of the full sample. Interestingly, the effect differed substantially across signs of earnings management. The regression results of different forms of earnings management showed a contrast and indicated that the auditor tenure can mitigate the activities of income-increasing activities in the positive model, the auditor tenure and auditor industry specialization can explain the incentives for managing earnings in the negative model. Moreover, this study found no evidence of the impact of provincial governance on earnings management in the full regression model. However, a negative effect of provincial governance on earnings management was found in the case of a motive for upward earnings management, while good governance tends to provide greater benefits to reduce the occurrence of negative earnings management. After controlling for dummy listing and interaction variables that may be related to audit quality and institutional environment, this relationship remains unchanged. Finally, The study’s findings make several contributions to the earnings management literature and are relevant for investors, policymakers, and firms.

Earnings Management And Privatisations: Evidence From Pakistan Evidence From Pakistan

This study examines the incidence of earnings management around the time of the privatisation of State Owned Enterprises in Pakistan during 1991-2005. Using the modified Jones model and a sample of large privatisations (minimum US$1 million), it shows that the sampled firms experienced increase in earnings, decrease in cash flows, and increase in current discretionary accruals in the year prior to and/or in the year of privatisation. The SOEs used both short term and long term accruals to inflate reported earnings. These accruals were reversed in the post-privatisation period. These findings suggest that managers of the firms slated for privatisation were engaged in earnings management to inflate their firms‘ financial worth to maximise the privatisation proceeds. Hence, we cannot reject the incidence of earnings management during privatisations in Pakistan. The results imply that the investors should carefully evaluate the to-be-privatised firms and keep in view the possibility of earnings management by the SOEs. JEL Classification: G14, G34, G38, L33, M41 Keywords: Earnings Management, Privatisations, SOEs, Pakistan, Accruals

Earnings management around equity issuances in Vietnamese listed firms

This study examines accrual earnings management in Vietnamese listed firms around equity issuances. Using a matching approach, we find that issuers tend to report higher earnings by aggressive recognition of discretionary current accruals before and during the years of equity offering. This results in significantly larger abnormal stock returns for the issuing firm-years, as the capital market overvalues firms with higher accrual earnings. However, regression results show that investors are subsequently disappointed by negative reversals in earnings, and suffer from significant negative abnormal returns in the third year after the issuance. These results provide additional empirical evidence in an emerging and transition market context, and caution investors against fixation on reported earnings in equity offerings.

Earnings management and listing day performance of IPOs in India

PurposeThe purpose of this study is to examine the influence of earnings management during initial public offerings on the listing day returns.Design/methodology/approachThe study collected data for 511 Indian IPOs that came between April 2003 and March 2019 for calculating earnings management. On the basis of the Cross Sectional Modified Jones Model 1995, the paper presents three proxies of earnings management as discretionary accruals (DA), discretionary current accruals (DCA) and discretionary long-term accruals (DLA). The study further used correlation and multiple regression analysis to assess the impact of earnings management on listing day returns.FindingsThe findings show that earnings management and listing day returns vary through issue-year and industry-type. Apart from it, the study reveals a greater contribution of short-term accruals in earnings management on the basis of higher DCA values. It also discloses that the aggregate level of earnings management (DA) influences listing returns, whereas DCA and DLA separately have no impact on the listing day returns of the Indian IPOs.Research limitations/implicationsThe findings are useful to potential investors and analysts to observe, assess and understand the quality of financial reports that are based on fallacious disclosure of accounting figures. The study also reflects the efficacy of Indian regulatory norms for IPOs in constraining earnings management and underpricing, thus providing meaningful insight to the policy makers and the regulators.Originality/valueThis study is distinguished by its focus on determining the influence of earnings management on listing day returns in Indian IPOs by using three earnings management proxies.

Earnings management and issue characteristics: an empirical analysis of IPOs in India

PurposeThis study aims to examine earnings management around initial public offerings (IPOs) in India. It also explores the influence of issue characteristics on earnings management around the IPOs.Design/methodology/approachA sample of 511 IPOs that came during April 2003-March 2019 is studied for calculating earnings management for pre-issue, issue and post-issue years. Using Cross-Sectional Modified Jones Model, the paper presents earnings management on the basis of three proxies i.e. discretionary accruals, discretionary current accruals and discretionary long-term accruals. The influence of issue characteristics on earnings management practised around the IPOs is also observed through correlation and multiple regression analysis.FindingsThe paper finds that earnings management is abnormally high during the issue year compared with pre-issue and post-issue years. It also unveils that profitability, premium, age, and size of the issuer significantly determine the level of pre-issue and issue year earnings management practised by Indian IPO issuers.Research limitations/implicationsThe findings are useful to stakeholders (potential investors, analysts and regulators) to observe, assess and understand the quality of financial numbers that are based on fallacious disclosure of accounting figures. It provides insight into the possibilities of managed earnings around the issue that could influence investors’ decision-making. Further, the study reflects the efficacy of Indian regulatory norms for IPOs.Originality/valueTo the authors’ knowledge, it is the only Indian study that had used an extensive data set of about two decades to calculate earnings management during pre-issue, issue and post-issue years. The uniqueness of the study further lies in three proxies of earnings management representing short-term and long-term accruals. Moreover, it is the first study to observe the influence of IPO issue characteristics on earnings management.

Earnings management and initial public offerings among Indonesian manufacturing companies

Earnings management (EM) refers to the common use of accounting techniques in various economic settings, such as Initial Public Offerings (IPOs), to produce financial statements. This study, therefore, analyzes the effect of firm size, operating cash flow, the used IPO proceeds, earnings changes, and leverage on EM of manufacturing companies on the Indonesia Stock Exchange from 1989 to 2013. This sector comprises the essential chemical industry, miscellaneous organizations, and consumer goods, with 63 firms being used to meet the selection criteria. The regression analysis showed that the intended use of funds and leverage had a negative and significant impact on EM. Furthermore, the process is measured using Friedlan’s (1994) Discretionary Current Accruals model with similar results found in each industry group and their insignificant differences used to regulate the level of discretionary accruals between the three sectors. This study implies that the EM level is qualitatively similar among IPO companies in the three sub-sectors examined. AcknowledgmentsThe authors are grateful to the audience for their comments during the 11th Environmental and Sustainability Management Accounting Network-Asia Pacific (EMAN-AP) Conference held at the Danang University of Economics, Danang, Vietnam, 12-13 August 2019. The early draft was titled “Earnings Management and Initial Public Offerings on Manufacturing Sectors Companies”.

Earnings management, corporate governance, and ownership structure of Philippine initial public offerings

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.

Earnings Management and Long-run Post-issue Performance of IPOs in India

The controversies surrounding accounting figures bring forth the downgraded quality of financial statements in India. Opportunistic management of earnings at the cost of stakeholders’ interest requires prompt regulatory measure as they may become grave in high profile corporate events like mergers and public issues. Focusing on one of the most important mega events of initial public offerings (IPOs) the present study evaluates the accounting figure of IPOs that came out during April 2010 to March 2013. The study measures pre and post issue earnings management for a time span of 11 years from April 2008 to March 2019 and post issue long run earnings and stock performance using Modified Jones Model (1995) for a time span of seven years including issue year and six post issue years. The study provides evidence of earnings management by Indian IPO firms and post issue earnings and stock underperformance due to reversal of discretionary current accruals of issue year. The study emphasizes on better monitoring and regulatory environment and precise definition of accounting choices to control managed accounts to avoid frequent fraud incidents.

How do stock-for-stock acquirers manage earnings? The accruals feature of real earnings management

This paper investigates whether stock-for-stock acquirers undertake real activities to manage earnings before merger announcements. Our results show that stock-for-stock acquirers present unusually high levels of credit sales and overproduction in the quarter immediately before the merger announcement. We also find that the accruals feature of real earnings management can explain the stock-for-stock acquirers’ high discretionary current accruals. In addition, stock-for-stock acquirer firms that accelerate their credit sales experience subsequent market underperformance. Overall, we provide a novel insight into the accruals feature of real earnings management.

Company Headquarters, Local Conservatism and Earnings Management

Previous literature demonstrates that local cultural values influence the corporate decisions and outcomes of companies headquartered in those locations. Based on this premise, the findings of the current study demonstrate that the conservatism levels of provinces of company headquarters of non-financial public companies quoted at the Borsa Istanbul between the years 2009 and 2017 are positively related to companies’ discretionary current accruals levels. Similar findings are derived for the provinces of corporate incorporation. The findings also demonstrate that there is a statistically significantly positive relationship between discretionary current accruals and subsequent operating performances of companies, on average. Based on the argument in previous literature that more conservative individuals are likely to make more ethical decisions, these findings can be considered suggesting that earnings are managed with an informative intend in the Turkish setting where potential motives for company executives to manage earnings opportunistically are not likely to be strong. The findings are robust to various proxies and model specifications, and they contradict the findings of the majority of previous studies.

Upper Echelons Theory, Conservative Chairmen and Informative Earnings Management

The current study focuses on the conservatism levels of provinces of birth of company chairmen to investigate whether public companies quoted at the Borsa Istanbul between the 2009 and 2017 engage in earnings management with an informative intent. Turkey provides a unique setting to investigate the issue in hand since the common ownership structures of public companies and laws and regulations are not likely to provide corporate executives with a high motivation to manage earnings in an opportunistic manner. The findings demonstrate that the level of chairmen conservatism has a positive effect on income-increasing discretionary current accruals. In addition, company performance in the subsequent years are positively associated with discretionary current accruals. Overall, the findings suggest that companies quoted at the Borsa Istanbul appear to be engaged in earnings management with an informative intent. The findings are robust to various conservatism proxies and model specifications.

MEKANISME TATA KELOLA KORPORAT DAN PEREKAYASAAN LABA DI PERBANKAN PUBLIK INDONESIA

The study examines the role of the institutional ownership, managerial ownership, board of directors, and the audit committee in preventing earnings management. All of independent variable associated with reduced levels of discretionary current accruals. They are associated with firms that have smaller discretionary current accruals. We conclude that institutional ownership, managerial ownership, board and audit committee activity may be important factors in constraining the propensity of managers to engage in earnings management.

MANAJEMEN LABA DAN PERUBAHAN TARIF PPH UNDANG-UNDANG NO. 36 TAHUN 2008 (Studi Empiris pada Perusahaan BUMN dan Non-BUMN di BEI Tahun 2007-2010 )

Income Tax Act current in Indonesia is marked by the issuance of Law No. 36 of 2008. These laws regulate some fundamental changes in the calculation of corporate income tax for companies in Indonesia. One of the most fundamental changes is the change in the rate used in calculating the tax for the company, which was originally using progressive rates (maximum rate of 30%) to 28 % in 2009, and will be 25 % in 2010. 
 
 This study is a descriptive study with a quantitative approach. Based on predefined criteria sample, then the total number of samples studied is 193 samples. The variables of study include the discretionary accrual earnings management use with Jones model are current asset changes, cash changes, changes in current liabilities, changes in short-term debt, and changes to the income tax paid. Methods of data collection with secondary data are obtained through documentation of ICMD years 2007-2010. Analysis use parametric statistical with t -test and the non-parametric with Wilcoxon test.
 
 The results showed all the company showed indications of earnings management before and after the tax law No. 36 in 2008. State-owned companies showed no difference in earnings management prior to the year after adoption of Law No. 36 in 2008, meanwhile the non-SOE companies show indication of earnings management. 
 
 Keywords: The issuance of Law No. 36 of 2008, income tax, earnings management, discretionary current accruals.

Debt Issues and Earnings Management

ABSTRACT The aim of this paper is to analyze earnings management (EM) surrounding debenture issues of companies listed on the BM&FBOVESPA. EM is an intentional intervention in external financial reports in order to obtain some private gain. This practice is especially important at the time of issuing debentures because if earnings are inflated, investors may pay an artificially high price. To measure earnings management, current discretionary accruals were used as a proxy, based on the Modified Jones and Modified Jones with ROA econometric models. All of the regressions considered the fixed effects of the companies and the time series effects of the analyses. Evidence was found that companies inflate their financial results in the issuing period in order to positively influence their investors. The results suggest that there is EM in the quarter preceding the issue (t = - 1), indicating the influence that investors may have been under when making the decision to invest in debentures from these companies. In addition, it was verified that companies with higher debt, profitability, and sales growth ratios have higher levels of earnings management. The reputation of the auditor was not statistically significant regarding reductions in the level of management. The results also show that companies listed on Level II and New Market had higher levels of management when considering the Modified Jones with ROA model. Therefore, it can be concluded that there is a greater level of earnings management in companies that issue debentures in the period preceding the event. Finally, the variable that is directly related to the level of earnings management is sales growth.

Earnings Management, Investor Type, and Firm Performance of Private Placements

This study investigates the determinants of accrual-based earnings management and real earnings management (REM), and explores the influences of these earnings management activities on post-issue performance of private placements in Taiwan. The results show that investor type influences a firm’s REM activities before a private placement. Compared with discretionary current accruals, REM leads to significantly reduced long-term performance. Notably, the relationship between pre-issue REM and long-run performance is significantly negative for non-strategic private placement firms, whereas the relationship is insignificant for strategic private placement firms.

The earnings management opportunity for US oil and gas firms during the 2011 Arab Spring event

Purpose – This study aims to examine whether US oil and gas companies engaged in earnings management during the 2011 Arab Spring, which resulted in significant increases in both crude oil and gasoline prices. Design/methodology/approach – Following a similar research methodology from prior research, this study tests the existence of earnings management based on discretionary total accruals, current accruals and non-current accruals to determine whether both large petroleum refining firms and relatively small oil and gas-producing firms, jointly and separately, lowered reported earnings. Findings – The results show that, overall, US oil and gas companies as a group engaged in income-decreasing earnings management during the Arab Spring. The results seem to support the political cost hypothesis. However, further analyses indicate that the results are driven by abnormal income-decreasing accruals of the relatively small oil and gas-producing firms, which are politically less sensitive. Research limitations/implications – The findings suggest that there may be other non-political cost incentives, such as income smoothing, for the relatively small oil and gas-producing firms managing earnings downward during periods of large oil price increases. However, the possibility for firms with reversals of income-increasing activity from other quarters is not ruled out. Originality/value – This study not only is the first empirical study of earnings management by oil and gas companies during the Arab Spring, but also contributes to extant earnings management literature regarding political cost hypothesis, which still remains a major concern for US oil and gas companies.

Corporate governance mechanisms, sensitive factors and earnings management in Nigerian oil and gas industry

Oil and gas industry is considered as the sector that contributes a big share to the Nigeria economy. This study investigated the effects of corporate governance mechanisms, sensitive factors on earnings management of quoted oil and gas firms in Nigeria using the sample of nine (9) listed oil and gas firms for the period of ten years (2004-2013). Discretionary current accruals was used as the proxy for earnings management. Corporate governance mechanisms (boards size, chief executive officer (CEO) duality, directors’ ownership, audit committee size, audit committee independence), sensitive factors (corporate tax, corporate profit, corporate social responsibility) served as independent variables. The study concludes that corporate governance mechanisms curves earnings management while sensitive factors increase earnings management. The study recommends that corporate governance regulations should be strengthened to reflect present challenges.

Good corporate governance and earnings management in Indonesian initial public offerings

This study investigates the relationship between corporate governance mechanisms and earnings management (as measured by discretionary current accruals) for Indonesian IPO firms. Previous studies have mainly focused on an examination of the effect of corporate governance on the earnings management of publicly traded firms, whilst this study examines newly listed firms. It employs a modified Jones model to measure earnings management as developed by Tykvova (2006). The hypothesis predicts that Indonesian IPO firms with good corporate governance will engage in less earnings management in the periods prior to the IPO year. The sample consists of 75 IPOs and the results show that the proportion of board of commissioners, public ownership, institutional ownership and managerial ownership constrain the extent of earnings management of IPO firms. This study contributes to the literature in showing that corporate governance mechanism is an important determinant in earnings management practices for Indonesian IPO firms.

Earnings Management and Initial Public Offerings (IPOs) at Tehran Stock Exchange (TSE)

This paper attempted to examine the earnings management in the initial public offerings of corporate shares at Tehran Stock Exchange (TSE). Using a sample 47 companies listed on Tehran Stock Exchange during 2000 to 2009, this research analyzes the model for discretionary current accruals. The results showed managers manipulated the corporate earnings through the discretionary current accruals three years before admission to the Stock Exchange manage. Additionally, the results revealed that managers tended to manipulate the earnings during the year prior to the public offerings though the discretionary current accruals, even though there was no evidence suggesting that managers manipulated the earnings at the IPO year. DOI: 10.5901/mjss.2015.v6n6s6p92