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Article
Publication date: 11 April 2018

Kareen Brown, Fayez A. Elayan, Jingyu Li and Zhefeng Liu

The purpose of this paper is to investigate whether US regulatory actions around reverse mergers (RM) have exerted any spillover effects on the Chinese firms listed in…

Abstract

Purpose

The purpose of this paper is to investigate whether US regulatory actions around reverse mergers (RM) have exerted any spillover effects on the Chinese firms listed in China and whether Chinese firms have exhibited lower financial reporting quality than their US counterparts.

Design/methodology/approach

To test the possible spillover effect, this paper calculates three-day cumulative average abnormal returns (CAAR) and the aggregate CAAR for a series of US regulatory actions in 2010 and 2011. The study then compares the accrual quality, conditional conservatism, and information content of accruals of Chinese firms and US firms.

Findings

The paper documents a spillover effect of US actions around RM on Chinese stocks listed in China. Overall results do not support the perception that Chinese firms have lower financial reporting quality than their US counterparts.

Research limitations/implications

While this study provides evidence consistent with investors perceiving poor financial reporting quality among Chinese firms, that perception is not justified by empirical evidence.

Practical implications

Investors need not be overly concerned about the financial reporting quality among the Chinese firms when they make asset allocation decisions.

Social implications

A reality check is important given that perceptions may be outdated, biased, misleading, and costly.

Originality/value

This study puts the financial reporting quality of Chinese firms into perspective helping global investors assess information risk for optimal resource allocation.

Details

China Finance Review International, vol. 8 no. 4
Type: Research Article
ISSN: 2044-1398

Keywords

Article
Publication date: 3 May 2016

Javad Izadi Zadeh Darjezi

Managers, investors and security analysts all pay special attention to the bottom line of income statements and they miss significant information included in accruals

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Abstract

Purpose

Managers, investors and security analysts all pay special attention to the bottom line of income statements and they miss significant information included in accruals about the quality of earnings. A considerable portion of the earnings-quality literature examines the possibility of using the accruals to shift reported income among fiscal periods. One of the main roles of working-capital accruals is to adjust the recognition of cash flows. This paper aims to focus on earnings quality by examining the working-capital accruals quality using the method of Dechow and Dichev (2002).

Design/methodology/approach

Following the Dechow and Dichev (2002) model, the result of this paper shows that accrual quality is related to the absolute magnitude of accruals negatively. Also, the standard deviation of accruals, cash flows, sales and earnings is positively related to firm size. The result demonstrates and suggests that these observable firm characteristics can be used as instruments for measuring accrual quality. According to this framework, the author expects that the larger the unsigned abnormal accrual measure, the lower the earnings quality. Therefore, firms with low accrual quality have more accruals that are unrelated to cash flow realisations and so have more noise and less persistence in their earnings.

Findings

After examining earnings and accrual quality, this paper finds that average UK company behaviour was quite similar to the behaviour found earlier in the USA. This paper’s findings show that greater volatility of sales, cash flow, accruals and earnings results in a lower accrual quality. Without a doubt, some of the analysis in this paper, especially that using different equations to calculate working-capital accruals, leads us to a valuable improvement of the earlier studies.

Originality/value

In this paper, the author follows the method of Dechow and Dichev (2002) and define accrual quality as the extent to which accruals map into cash-flow insights based on the UK data. To find the quality of working-capital accruals, the author uses the standard deviation of the residuals as accrual quality that resulted from the author’s firm-specific OLS regressions of working-capital accruals based on last, current and one-year-ahead operating cash flow. Unlike prior research, to avoid a restriction to working-capital accruals, we use different equations to cover more items of working-capital accruals.

Details

International Journal of Accounting & Information Management, vol. 24 no. 2
Type: Research Article
ISSN: 1834-7649

Keywords

Article
Publication date: 12 October 2012

Doina C. Chichernea, Anthony D. Holder and Jie (Diana) Wei

The purpose of this paper is to investigate the connection between the accrual quality and the growth/value characteristics (and their return premia) at firm level.

Abstract

Purpose

The purpose of this paper is to investigate the connection between the accrual quality and the growth/value characteristics (and their return premia) at firm level.

Design/methodology/approach

The paper employs a battery of univariate and multivariate cross‐sectional tests. Fama‐MacBeth regressions with main effects and interaction effects are used to identify the relation between accrual quality, book‐to‐market and returns. The analysis is conducted on the overall sample, as well as after conditioning on up and down markets.

Findings

Value (growth) stocks are more likely to be associated with high (low) accrual quality. Value stocks earn higher returns mainly in down markets, while poor accrual quality firms have significantly higher returns during up markets, but significantly lower returns during down markets. There is a significant interaction effect between accrual quality and the value premium, which only exhibits in the down markets (i.e. stocks with poor accrual quality earn a higher value premium in down markets than stocks with good accrual quality).

Originality/value

Results in this paper help disentangle between various explanations proposed for the accrual quality premium and the value premium. These findings are consistent with the idea that the same underlying risk factor generating the value premium also generates the cross‐sectional variation in accrual quality responsible for the accrual quality premium. From the corporate managers' perspective, the results imply that value firms can mitigate their higher costs of capital by providing high quality of accounting information. From an analyst's perspective, the study suggests that considering both accrual quality and growth characteristics can help make better portfolio allocation decisions than when these are considered separately.

Details

Managerial Finance, vol. 38 no. 12
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 14 July 2020

Stephen Gray and Arjan Premti

This study examines how lenders modify their behavior and their use of traditional, transaction-based lending models in credit decisions when faced with low earnings quality.

Abstract

Purpose

This study examines how lenders modify their behavior and their use of traditional, transaction-based lending models in credit decisions when faced with low earnings quality.

Design/methodology/approach

To measure the earnings quality, following Bharath, Sunder and Sunder (2008), the authors use three measures of accrual quality and combine them into a simple parsimonious measure of accrual quality. Subsequently, the authors apply the incremental R-square approach used by Kim and Kross (2005) to determine the degree to which lenders modify their reliance on financial statement ratios when faced with low accrual quality.

Findings

Consistent with prior literature, this study shows that the cost of debt is higher when accrual quality is low. In addition, this study extends prior literature by showing that lenders decrease their reliance on income statement data to make credit decisions as accrual quality decreases.

Originality/value

This paper broadens existing literature on the pricing of information risk in capital markets by being the first to show that lenders modify their reliance on financial statement data when faced with low-quality accruals. In addition, this paper extends the findings of Billings and Morton (2002) and demonstrates to managers the futility of using accrual manipulations to obtain more favorable credit terms. Lastly, this paper aids regulators and standard setters who seek to improve the usefulness of financial statements by showing that creditors do not appear to be misled by reporting choices that lower the quality of accruals.

Details

Managerial Finance, vol. 47 no. 1
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 9 June 2020

Khairul Anuar Kamarudin, Akmalia Mohamad Ariff and Wan Adibah Wan Ismail

This paper aims to investigate the joint effect of product market competition (PMC) and institutional environment on accrual quality.

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Abstract

Purpose

This paper aims to investigate the joint effect of product market competition (PMC) and institutional environment on accrual quality.

Design/methodology/approach

The sample covers a large data set of 52,138 firm-year observations from 35 countries over the period of 2011-2015. Using the weighted least square regression, the study estimates PMC and institutional environment on accrual quality. The study measures PMC based on Herfindahl-Hirschman index, anti-director rights index (ADRI) based on the revised and updated La Porta et al.'s (1998) and accrual quality using the modified Dechow and Dichev (2002) model proposed by McNichols (2002). The study also uses a series of specification tests using alternative measures for each variable.

Findings

The study finds that highly intensified PMC relates to a lower quality of accruals. The results also show that accrual quality is better in countries with stronger institutional environment, specifically countries with higher ADRI, investor protection, judicial independence, protection of minority shareholders’ interests, protection of property rights, strength of the auditing and reporting standards, efficacy of corporate boards and corporate ethics. The findings suggest that institutional factors weaken the negative impact of PMC intensity on accrual quality, hence suggesting that institutional environment has a significant role to enhance accrual quality among firms in highly intensified industries.

Practical implications

The findings provide additional insights to policymakers and regulators on the importance of strong institutional and industry environment that can provide incentives and extra governance mechanisms besides the conventional firm-level corporate governance.

Originality/value

This study contributes in understanding the impact of intensity of PMC on accrual quality internationally and subsequently highlights the role of institutional environment as significant country-level governance in determining financial reporting quality, particularly accrual quality.

Details

Pacific Accounting Review, vol. 32 no. 3
Type: Research Article
ISSN: 0114-0582

Keywords

Article
Publication date: 5 October 2015

Elizabeth Mey and Marna de Klerk

– The purpose of this paper is to examine whether Chartered Accountants South Africa (CAs(SA)) as Chief Executive Officers (CEOs) have an association with accruals quality.

Abstract

Purpose

The purpose of this paper is to examine whether Chartered Accountants South Africa (CAs(SA)) as Chief Executive Officers (CEOs) have an association with accruals quality.

Design/methodology/approach

The theoretical base of this paper is the link between accounting expertise and accruals quality. The sample consists of 812 observations of Johannesburg Stock Exchange (JSE)-listed firms between 2010 and 2013. The association is tested by regressing the CA(SA) as CEO interest variable and control variables on accruals quality, using three metrics of abnormal accruals.

Findings

The overall results suggest that less accruals management and estimation error is present when the CEO is a CA(SA).

Originality/value

This is the first study to test the association between having a CEO with a professional accounting qualification, such as CA(SA), and accruals quality. The findings will be of interest to shareholders and top executives when evaluating the appointment of a CEO.

Open Access
Article
Publication date: 27 August 2020

Muljanto Siladjaja and Yuli Anwar

The purpose of this study is to test and prove how the quality of innate accruals can make a significant contribution to the prospect of future market value for…

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Abstract

Purpose

The purpose of this study is to test and prove how the quality of innate accruals can make a significant contribution to the prospect of future market value for manufacturing industries.

Design/methodology/approach

This research used multiple regression method by gathering all observation data on a go public company in the industrial manufacturing sector.

Findings

The results of this test can show that the dividend policy helps reduce the use of accruals to increase investor perceptions about the prospects of the company's future period, especially the value of earnings informativeness, including valid information about the actual fundamental conditions. These results reflect high innate accruals quality, so the use of low accruals, especially in reporting earnings.

Research limitations/implications

This test uses a measurement of a constant growth rate with the calculation of the indicator g in the next five-year period, and the proof has secondary data abnormalities reflecting a very high level of variation in the use of accruals. As an implication of the data that is not normal, it causes a large amount of data pruning through outlier tests. Samples that qualify for processing are 180 from 384 data.

Originality/value

By calculating the value of the dividend payout with the growth rate, the estimated future market price can be done with reasonable accuracy.

Details

Asian Journal of Accounting Research, vol. 5 no. 2
Type: Research Article
ISSN: 2443-4175

Keywords

Article
Publication date: 5 May 2015

Masumi Nakashima and David A. Ziebart

– The purpose of this paper is to investigate whether Japanese Sarbanes – Oxley Act (J-SOX) impacted earnings management and earnings quality of public firms in Japan.

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Abstract

Purpose

The purpose of this paper is to investigate whether Japanese Sarbanes – Oxley Act (J-SOX) impacted earnings management and earnings quality of public firms in Japan.

Design/methodology/approach

This archival study compares earnings management and earnings quality of firms that disclose at least one material weakness with a sample matched on size and industry without a material weakness.

Findings

The authors investigate whether the differences in regulations, corporate governance and regulatory environment acceptance influence earnings management and earnings management of Japanese listed firms, relative to findings in the USA. They found the Japanese results to be slightly different from the results found in previous USA studies. First, the time-series observations suggest that while accruals management and real earnings management remained unchanged for control firms, accruals management and real earnings management increased for material weaknesses disclosing firms following J-SOX. The regression analyses suggest that accruals management for both the groups is significant in the pre-and post-J-SOX periods, but that real earnings management declined for both the groups post-J-SOX. Second, while, both accruals quality and accuracy of cash flow predictions improved in the post-J-SOX period.

Research limitations/implications

The sample of Japanese firms disclosing a material weakness is small because the number of firms that disclose internal control deficiencies is decreasing in Japan. The authors have no evidence that their results are not generalizable to a larger sample and leave this for future research.

Practical implications

The authors provide evidence that J-SOX, which does not have a direct reporting system, does not constrain earnings management. Their results drive the regulator to reconsider whether the reporting system works in the Japanese business environment. Additionally, their results show that J-SOX has no effect on earnings management; thus, regulators need to reconsider the governance function of directors and internal auditors. This paper communicates to the world how J-SOX works in Japan through changes in earnings quality and management post J-SOX and the root problems.

Originality/value

This paper is the first (of which the authors are aware) to examine whether J-SOX impacted both earnings management and earnings quality in Japan. This paper discusses how the differences in regulations and corporate governance as well as the differences between USA-SOX and J-SOX may explain the results observed in Japan. This paper provides results regarding whether J-SOX improved earnings quality.

Details

Managerial Auditing Journal, vol. 30 no. 4/5
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 4 January 2011

M. Humayun Kabir, Divesh Sharma, Ainul Islam and Amirus Salat

Bangladesh is an emerging economy and international audit firms operate there through affiliated local audit firms. The Bangladesh audit market can be characterized as an…

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Abstract

Purpose

Bangladesh is an emerging economy and international audit firms operate there through affiliated local audit firms. The Bangladesh audit market can be characterized as an intensely competitive small audit market with relatively poor demand for high‐audit quality. In addition, Bangladesh has a relatively small and under developed but growing capital market that is characterized by poor corporate regulation and weak investor protection. The purpose of this paper is to examine the association between Big 4 affiliated auditors and accruals quality in Bangladesh.

Design/methodology/approach

Following prior literature, this paper uses both absolute discretionary accruals and signed discretionary accruals as proxies of accruals quality. The sample is 382 firm‐year observations and covers fiscal years 2000‐2003.

Findings

It was found that the association between Big 4 affiliates and accruals quality in Bangladesh depends on measures of accruals quality and accruals models used. Overall, Big 4 affiliates do not have a positive impact on accruals quality of their clients in Bangladesh.

Originality/value

This paper contributes to the literature on audit quality and accruals quality. The results potentially suggest that Big 4 affiliates do not have any positive impact on accruals quality of clients in an intensely competitive audit market where the demand for quality audit is poor and monitoring is lax and raise potential implications for policy makers and market participants in Bangladesh.

Details

Managerial Auditing Journal, vol. 26 no. 2
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 12 July 2013

Robert Houmes, Maggie Foley and Richard J. Cebula

Audit quality studies document that accruals decrease when the audit firm is large, or the audit firm is an industry specialist, or the audit‐client tenure is long. The…

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Abstract

Purpose

Audit quality studies document that accruals decrease when the audit firm is large, or the audit firm is an industry specialist, or the audit‐client tenure is long. The purpose of this paper is to posit that incentives related to highly‐valued equity mitigate these results, as managers use income increasing accruals to augment earnings.

Design/methodology/approach

To test this assertion, the authors regress discretionary accruals on: controls, a highly valued equity indicator variable equal to 1 if the client's lagged price‐to‐earnings ratio is in the highest P/E quintile, indicator variables equal to 1 for alternative measures of audit quality, and interaction terms between the highly valued equity indicator variable and audit quality indicator variables.

Findings

Results of tests show positive and statistically significant coefficients for each of the highly‐valued equity‐audit quality interaction terms, suggesting that when a firm is highly valued the accruals' decreasing effect of high quality auditors is reduced.

Originality/value

Beginning with Jensen's article regarding the agency costs of overvalued equity, a stream of research examining factors associated with highly priced firms has developed. The paper extends these findings, as well as the considerable body of audit quality studies, by examining the ability of a high quality auditor to attenuate this result.

Details

Accounting Research Journal, vol. 26 no. 1
Type: Research Article
ISSN: 1030-9616

Keywords

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