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Article
Publication date: 6 May 2014

Mohamed Khalil and Jon Simon

The purpose of this paper is to examine whether the contracting incentives (i.e. bonus plans, debt covenants, political costs hypotheses), and income smoothing can explain…

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1574

Abstract

Purpose

The purpose of this paper is to examine whether the contracting incentives (i.e. bonus plans, debt covenants, political costs hypotheses), and income smoothing can explain accounting choices in an emerging country, Egypt.

Design/methodology/approach

The paper uses the ordinary least square regression model to examine the relationship between earnings management and reporting objectives. A sample of 438 non-financial firms listed on the Egyptian Exchange over the period 2005-2007 is used.

Findings

The paper finds that the contracting objectives explain little of the variations in accounting choices (i.e. discretionary accruals) in the Egyptian context. However, the paper finds that mangers are likely to smooth the reported earnings by managing the accrual component in an attempt to reduce the fluctuation in reported earnings by increasing (decreasing) earnings when earnings are low (high) in attempt to reduce the variability of the reported earnings.

Research limitations/implications

The empirical results rely on the ability of earnings management proxies to adequately capture earnings manipulation activities.

Practical implications

The findings of the study should be of substantial interest to regulators and policy makers. The results implicitly contribute to the ongoing argument in relation to the optimal flexibility permitted by standard setting and the argument that tightening the accounting standards and mandating International Financial Reporting Standards are likely to improve reporting quality and reduce opportunistic earnings management. The results reveal that many of the weaknesses related to corporate reporting in emerging countries may result from the inadequate enforcement of the law and the weak legal protection of minority shareholders. The results also highlight the crucial role of understanding the reporting incentives, which is mainly shaped by institutional and market forces and the legal environment, in explaining accounting choices.

Originality/value

Unlike previous studies that tested an individual objective, this study examines the trade-offs among various reporting objectives in an emerging economy.

Details

Journal of Applied Accounting Research, vol. 15 no. 1
Type: Research Article
ISSN: 0967-5426

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Article
Publication date: 28 September 2018

Cristian Baú Dal Magro, Roberto Carlos Klann and Vanessa Edy Dagnoni Mondini

CEOs’ (chief executive officer) term of office may explain discretionary accruals as a result of opportunistic behavior arising during certain periods of the term of…

Abstract

Purpose

CEOs’ (chief executive officer) term of office may explain discretionary accruals as a result of opportunistic behavior arising during certain periods of the term of office. Therefore, CEOs, in their early years of office, have incentives to report results that meet market expectations. In turn, CEOs in their senior year may be motivated to use discretionary accruals to gain private benefits. In this scenario, corporate governance mechanisms play an important role in monitoring relationships. Hence, the purpose of this study is to verify the influence of monitoring mechanisms on the relationship between CEOs’ term of office and discretionary accruals.

Design/methodology/approach

Descriptive statistics, multiple cross-sectional regression to estimate the accruals and regression of panel data to test the hypotheses were used. The sample comprised 195 companies listed on BM&FBovespa.

Findings

The results indicated that CEOs’ long term of office has a negative impact on the level of discretionary accruals, and thus, Brazilian CEOs with a longer term of office tend to establish a certain reputation in the stock market. On the other hand, it is concluded that CEOs’ intentions, in the first years of term, are positively related to the use of accruals and that the monitoring mechanisms can minimize these CEOs’ opportunistic practices.

Originality/value

The results broaden the literature on corporate governance, pointing that different systems of variable remuneration may influence CEOs’ willingness to manage results in their last year of term.

Details

RAUSP Management Journal, vol. 53 no. 4
Type: Research Article
ISSN: 2531-0488

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Article
Publication date: 11 September 2009

Sebahattin Demirkan and Harlan Platt

The purpose of this paper is to investigate, using data on US manufacturing firms, how and when corporate governance affects managers' decisions to use discretionary

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2797

Abstract

Purpose

The purpose of this paper is to investigate, using data on US manufacturing firms, how and when corporate governance affects managers' decisions to use discretionary accruals and thereby artificially influence company financial reports.

Design/methodology/approach

Three‐stage least squares is employed to study the relationship between financial status, corporate governance and financial reporting discretion. The sample spans the years 2001‐2003 during a severe downturn in the US stock market. Financial status is measured with the Altman Z‐score.

Findings

A significant difference is found between firms not classified as healthy or failed (i.e. the mid‐range group) and the two extreme categories when examining governance quotient using a well‐known index. A positive relationship is found between discretionary accruals and the governance index. Strong governance appears to reduce the incidence of mid‐range firms engaging in accruals management. The least healthy and the most distressed companies have the weakest relationship with discretionary accruals. By contrast, mid‐range firms are more likely to resort to discretionary accruals.

Practical implications

Non‐executive members of boards of directors are warned to be particularly vigilant about discretionary accruals with firms transitioning between healthy and high‐failure risk.

Originality/value

The relationship between firms' financial health and discretionary accruals reveals an agency problem in credit markets with financially stressed firms. More attention is required on firms whose financial condition is uncertain. Also, it is documented that significant findings of importance to the earnings quality and corporate governance literature by documenting the role of corporate governance on discretionary accruals and financial status.

Details

Accounting Research Journal, vol. 22 no. 2
Type: Research Article
ISSN: 1030-9616

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Article
Publication date: 28 January 2020

Dhouha Bouaziz, Bassem Salhi and Anis Jarboui

The purpose of this paper is to investigate the impact of chief executive officer (CEO) characteristics on the earnings management examined by the discretionary accruals.

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1430

Abstract

Purpose

The purpose of this paper is to investigate the impact of chief executive officer (CEO) characteristics on the earnings management examined by the discretionary accruals.

Design/methodology/approach

The sample includes 151 French firms listed on the CAC ALL shares index from 2006 to 2015. The paper uses the feasible generalized least square regression technique to test the relationship between CEO characteristics and earnings management.

Findings

Using discretionary accruals as a proxy for earnings management, the results obtained from the three models (Jones modified 1995; Kothari et al., 2005; Raman and Shahrur, 2008) indicated that there is a positive and significant relationship between CEO duality, CEO nationality and the quality of financial communication. However, no significant relationship was found between CEO board member, CEO turnover and earnings management.

Originality/value

A literature review finds that fewer studies have investigated the relationship between earnings management practices and personal CEO characteristics in the French context. Furthermore, no study yet has examined the influence of CEO nationality and CEO age on earnings management practices. This study provides empirical data about the impact of CEO’s characteristics on earnings management and how these different characteristics can facilitate the transition to manipulate and influence the quality of financial communication.

Details

Journal of Financial Reporting and Accounting, vol. 18 no. 1
Type: Research Article
ISSN: 1985-2517

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Article
Publication date: 16 November 2015

Manel Hessayri and Malek Saihi

The purpose of this paper is to examine whether International Financial Reporting Standards (IFRS) adoption complements corporate governance factors (e.g. ownership…

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1410

Abstract

Purpose

The purpose of this paper is to examine whether International Financial Reporting Standards (IFRS) adoption complements corporate governance factors (e.g. ownership structure) in monitoring managers’ discretional behavior in an emerging market context.

Design/methodology/approach

The paper relies on a sample of listed companies in the United Arab Emirates, Morocco, South Africa and the Philippines during an eight-year period on average (four years of pre-adoption period and four years of post-adoption period).

Findings

The authors find no evidence of lower earnings management after the switch to IFRS reporting, suggesting that managerial discretional behavior is insensitive to a firm’s IFRS adoption. However, the authors document effective monitoring role of a firm’s ownership structure on earnings management. More interestingly, institutional investors are effective in constraining earnings management when holding a high level of ownership. Moreover, the effect of blockholders and institutional blockholders varies as their ownership rises following a non-linear pattern.

Research limitations/implications

First, the assumption that discretionary accruals are adequate measure of earnings management may be criticized in different ways. Second, the findings, performed on listed companies in the United Arab Emirates, Morocco, South Africa and the Philippines, should be interpreted with caution and cannot be generalized to all emerging market countries.

Practical implications

Standards setters and market authorities should be aware of earnings management determinants to set adequate and fitting accounting standards limiting opportunistic behavior of managers and mainly to set up training programs to accounting professionals improving the IFRS implementation. Moreover, considering specific features of firms in emerging market countries related to ownership structure, international investors may rely on such criteria to evaluate firms. Finally, auditors should be aware of different incentives for earnings management in order to be able to detect eventual manipulation of accounting earnings.

Originality/value

This paper provides a timely contribution to the continuous debate of the effect of IFRS adoption on earnings management in a poorly exploited setting, emerging market context. When investigating, additionally, the eventual non-linear effect of institutional ownership, block ownership, institutional block ownership and non-institutional block ownership on earnings management, a major contribution is that it brings to light the finding of a differential influence of ownership levels on earnings management.

Details

Journal of Economic and Administrative Sciences, vol. 31 no. 2
Type: Research Article
ISSN: 1026-4116

Keywords

Content available
Article
Publication date: 10 July 2017

Nan Hu, Rong Huang, Xu Li and Ling Liu

Existing literature in experimental accounting research suggests that accounting professionals and people with accounting backgrounds tend to have a lower level of moral…

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10363

Abstract

Purpose

Existing literature in experimental accounting research suggests that accounting professionals and people with accounting backgrounds tend to have a lower level of moral reasoning and ethical development. Motivated by these findings, this paper aims to examine whether chief executive officers (CEOs) with accounting backgrounds have an impact on firms’ earnings management behavior and the level of accounting conservatism.

Design/methodology/approach

The authors classify CEOs into those with and without accounting backgrounds using BoardEx data. Using discretionary accruals from several different models, they do not find that CEOs with accounting backgrounds are more likely to engage in income-increasing accruals. However, the authors find that CEOs with accounting backgrounds exhibit lower levels of conservatism, proxied by C-scores and T-scores (Basu, 1997). This finding suggests that CEOs with accounting backgrounds recognize bad news more quickly than good news, consistent with the accounting principle of “anticipating all losses but anticipating no gains”.

Findings

The authors show that firms whose CEOs have accounting backgrounds exhibit lower levels of accounting conservatism. However, these firms do not exhibit higher levels of income-increasing discretionary accruals. This study documents the impact of CEOs’ educational backgrounds on firms’ accounting choices and confirms prior findings in experimental accounting research using large sample archival data.

Originality/value

This paper is the first study that investigates the impact of CEOs’ accounting backgrounds on firms’ financial reporting policy. The findings may have some policy implications. If accounting backgrounds of CEOs can make a significant difference on firms’ behavior, it is reasonable to make CEOs accountable for the quality of financial reporting. This paper is one of the first to empirically test inferences drawn by experimental accounting research. There has been a gap between archival and experimental accounting studies. The authors propose that interesting research questions can be addressed by filling in such a gap.

Details

Journal of Centrum Cathedra, vol. 10 no. 1
Type: Research Article
ISSN: 1851-6599

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Article
Publication date: 1 November 2004

Charlotte J. Wright and Liming Guan

Using a matching approach and multivariate logit analysis we determine that management of firms involved in MBOs more frequently chose income increasing accounting

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1653

Abstract

Using a matching approach and multivariate logit analysis we determine that management of firms involved in MBOs more frequently chose income increasing accounting policies than did a matched sample of non‐MBO firms. The results provide support for the managerial economic incentives hypothesis as a motivation for accounting policy choices. The results of the study are consistent with a number of earlier studies such as Groff and Wright (1989), Hagerman and Zmijewski (1979) and Zmijewski and Hagerman (1981) that also find support for the managerial economic incentives hypothesis for accounting choices. DeAngelo (1986), Perry and Williams (1994) and Wu (1997) find evidence supporting the hypothesis that, in order to reduce the cost of acquiring shares from current stockholders, managers seeking to take firms private make income decreasing discretionary accruals in the period immediately prior to the MBO. In testing this theory DeAngelo (1986), Perry and Williams (1994) and Wu (1997) focus on the overall effect of a pool of business decisions and accruals made in the year immediately prior to the MBO. We theorize that managements’ self‐serving behavior begins far in advance of the actual MBO. The final terms of the MBO are the culmination of numerous actions and choices by management over a period longer than one year. In testing our hypotheses we focus on three specific accounting policy choices made over a period of three years leading up to an MBO and find significant evidence of self‐serving behavior through the use of income increasing accounting policy choices.

Details

Managerial Finance, vol. 30 no. 11
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 June 1984

Wallace R. Wood

There is a divergence between costing methodology and spending behaviour in transportation. This article identifies differences between economic and accounting cost…

Abstract

There is a divergence between costing methodology and spending behaviour in transportation. This article identifies differences between economic and accounting cost concepts, and differences between the conceptual interpretations of cost estimates based on those concepts. In particular, the cost‐volume‐profit (breakeven) model is re‐examined in terms of its experimental and ex post estimates, and the reliability of those estimates, to describe and to guide managerial behaviour. Some criticism of statistical costing is warranted by the inherent difficulty of modelling human behaviour patterns. Likewise, enlightened interpretation of statistical cost estimates allows management to enhance the planning and control processes for which the figures were prepared.

Details

International Journal of Physical Distribution & Materials Management, vol. 14 no. 6
Type: Research Article
ISSN: 0269-8218

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Article
Publication date: 2 July 2020

Augusta Ferreira, João Carvalho and Fátima Pinho

The main purpose of this paper is to evaluate if, motivated by political competition, municipalities engage in earnings management practices through discretionary accruals.

Abstract

Purpose

The main purpose of this paper is to evaluate if, motivated by political competition, municipalities engage in earnings management practices through discretionary accruals.

Design/methodology/approach

Quantitative methodology.

Findings

Results indicate that, in those municipalities where political competition is greatest, there is a greater tendency to report positive net earnings close to zero. This study also indicates that for such purpose, discretionary accruals are used.

Originality/value

The purpose of this paper is to respond to the lack of information in the area of earnings management in the public sector, to be able to evaluate responsibility, performance and efficiency regarding the allocation of public resources and the degree of satisfaction of citizens/voters' needs-accountability.

Details

Journal of Public Budgeting, Accounting & Financial Management, vol. 32 no. 3
Type: Research Article
ISSN: 1096-3367

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Book part
Publication date: 3 September 2014

Edilson Paulo, Eliseu Martins and Luiz Felipe de Araújo Pontes Girão

We analyze the quality of accounting information reported by public firms in Latin America and United States of America.

Abstract

Purpose

We analyze the quality of accounting information reported by public firms in Latin America and United States of America.

Methodology/Approach

To reach our objective, an exploratory and descriptive research was developed. To analyze the dimensions of accounting information quality, the operational model present in literature were applied which assess the persistence in earnings (Dechow & Schrand, 2004), the level of conservatism (Ball & Shivakumar, 2005), accounting earnings management (Pae, 2005) and accruals quality measurement (Dechow & Dichev, 2002), in a sample composed of publicly traded companies in the markets of Latin America and the North America (represented by USA), totaling 2,526 companies, from 2005 to 2011.

Findings

Our results evidenced that financial reporting of Latin-American companies are less conservative (except for Brazilian companies) and has similar level of earnings management in comparison to the North-American ones. Concerning to the quality of accruals it was observed that there are significant differences especially related to accruals of Brazilian companies.

Practical Implications

Our results suggest differences in the quality of accounting information, originated by the economic environment where the company is inserted. So, investors must be careful when they are comparing firms between these markets, because the results were different for some cases, which may lead the investors to make misallocation of his resources.

Originality/value of paper

We expanded previous literature by the use of various proxies for accounting quality, comparing firms on emerging markets with the major capital market (USA), and the crises period of time.

Details

Accounting in Latin America
Type: Book
ISBN: 978-1-78441-067-4

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