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Open Access
Article
Publication date: 11 October 2019

Trang Thi Ngoc Nguyen and Phuong Kim Bui

The purpose of this paper is to examine the relationship between dividend policy and earnings quality of Vietnamese listed firms.

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Abstract

Purpose

The purpose of this paper is to examine the relationship between dividend policy and earnings quality of Vietnamese listed firms.

Design/methodology/approach

The sample includes firms listed on Vietnam stock exchange during the period between 2010 and 2016. Two measures of earnings quality are the annual firm-specific absolute value of residuals from Dechow and Dichev’s (2002) model and from Dechow and Dichev (2002) as modified by McNichols’s (2002) model. The firms’ dividend policy is captured by dividend paying status. This is a dummy variable that takes the value of 1 if the firm pays dividends and 0 otherwise. In addition, dividend yield and dividend payout ratio, which are continuous variables, are also used in this paper as alternative proxies for dividend policy.

Findings

Using panel data analysis, this paper documents that dividend payers have higher earnings quality than dividend non-payers. Dividends are an indicator of earnings quality. These findings are consistent with prior studies. After controlling for variables that may be related to earnings quality as well as for the year and industry fixed effects, this relation remains unchanged. In addition, this result is also robust after controlling for firm fixed effects.

Originality/value

This paper offers the empirical evidence on the relation between dividend policy and earnings quality in Vietnam, which is a frontier market.

Details

Journal of Asian Business and Economic Studies, vol. 26 no. 2
Type: Research Article
ISSN: 2515-964X

Keywords

Article
Publication date: 9 June 2020

Wing Him Yeung and Camillo Lento

The purpose of this paper is to investigate the relationship between corporate governance and earnings opacity in China.

Abstract

Purpose

The purpose of this paper is to investigate the relationship between corporate governance and earnings opacity in China.

Design/methodology/approach

Two corporate governance mechanisms form the basis of the analysis: 1) the board of directors and 2) the external audit function. OLS regression analysis is employed on a large sample from 2000 to 2014 with 20,235 firm-year observations.

Findings

Corporate governance is found to be associated with reduced levels of earnings opacity for Chinese listed companies. Furthermore, the association between corporate governance and reduced levels of earnings opacity strengthened after the implementation of various key reforms.

Practical implications

Chinese regulators are advised to proceed with caution as not all Western approaches to corporate governance are transferrable to the Chinese setting.

Originality/value

This study contributes to the literature by analyzing broad latent constructs of corporate governance in addition to individual observable dimensions in order to reveal that various key reforms have been successful in strengthening the link between governance and reporting quality for Chinese listed companies.

Details

Asian Review of Accounting, vol. 28 no. 4
Type: Research Article
ISSN: 1321-7348

Keywords

Article
Publication date: 16 June 2021

Saleh Abd Alhadi, Rosmila Senik, Jalila Johari, Ridzwana Mohd Said and Hairul Suhaimi Nahar

This study aims to investigate whether higher earnings quality is related to the existence of multiple directorships among corporate boards and whether this relationship varies…

Abstract

Purpose

This study aims to investigate whether higher earnings quality is related to the existence of multiple directorships among corporate boards and whether this relationship varies with the quality of investor protection.

Design/methodology/approach

This paper used a dynamic panel data modelling on the sample of 2,090 firm-year observations over the period from 2007 to 2016 in Malaysia. The generalized method of moments estimators were used to deal with endogeneity and other econometric problems.

Findings

This study finds that the accumulation of several outside directorships is negatively associated with the firm's earnings quality, as measured by the magnitude of discretionary accruals. More importantly, the findings provide evidence that multiple directors are more efficient in improving earnings quality in healthy investor protection environment.

Practical implications

The appointment of directors should be based on market-based and not on a relationship (i.e. financial and industry professionals).

Originality/value

The results highlight the importance of interaction between internal and external governance mechanisms to improve the firm's financial performance, investment and market efficiency. High-quality investor protection and law enforcement are significant for enhancing the monitoring role of multiple directorships in improving earnings quality.

Details

Journal of Asia Business Studies, vol. 15 no. 4
Type: Research Article
ISSN: 1558-7894

Keywords

Article
Publication date: 17 September 2021

Ahmed Hassan Ahmed, Yasean Tahat, Yasser Eliwa and Bruce Burton

Earnings quality is of great concern to corporate stakeholders, including capital providers in international markets with widely varying regulatory pedigrees and ownership…

Abstract

Purpose

Earnings quality is of great concern to corporate stakeholders, including capital providers in international markets with widely varying regulatory pedigrees and ownership patterns. This paper aims to examine the association between the cost of equity capital and earnings quality, contextualised via tests that incorporate the potential for moderating effects around institutional settings. The analysis focuses on and compares evidence relating to (common law) UK/US firms and (civil law) German firms over the period 2005–2018 and seeks to identify whether, given institutional dissimilarities, significant differences exist between the two settings.

Design/methodology/approach

First, the authors undertake a review of the extant literature on the link between earnings quality and the cost of capital. Second, using a sample of 948 listed companies from the USA, the UK and Germany over the period 2005 to 2018, the authors estimate four implied cost of equity capital proxies. The relationship between companies’ cost of equity capital and their earnings quality is then investigated.

Findings

Consistent with theoretical reasoning and prior empirical analyses, the authors find a statistically negative association between earnings quality, evidenced by information relating to accruals and the cost of equity capital. However, when they extend the analysis by investigating the combined effect of institutional ownership and earnings quality on financing cost, the impact – while negative overall – is found to vary across legal backdrops.

Research limitations/implications

This paper uses institutional ownership as a mediating variable in the association between earnings quality and the cost of equity capital, but this is not intended to suggest that other measures may be of relevance here and additional research might usefully expand the analysis to incorporate other forms of ownership including state and foreign bases. Second, and suggestive of another avenue for developing the work presented in the study, the authors have used accrual measures of earnings quality.

Practical implications

The results are shown to provide potentially important insights for policymakers, creditors and investors about the consequences of earnings quality variability. The results should be of interest to firms seeking to reduce their financing costs and retain financial viability in the wake of the impact of the Covid-19 pandemic.

Originality/value

The reported findings extends the single-country results of Eliwa et al. (2016) for the UK firms and Francis et al. (2005) for the USA, whereby both reported that the cost of equity capital is negatively associated with earnings quality attributes. Second, in a further increment to the extant literature (particularly Francis et al., 2005 and Eliwa et al., 2016), the authors find the effect of institutional ownership to be influential, with a significantly positive impact on the association between earnings quality and the cost of equity capital, suggesting in turn that institutional ownership can improve firms’ ability to secure cheaper funding by virtue of robust monitoring. While this result holds for the whole sample (the USA, the UK and Germany), country-level analysis shows that the result holds only for the common law countries (the UK and the USA) and not for Germany, consistent with the notion that extant legal systems are a determining factor in this context. This novel finding points to a role for institutional investors in watching and improving the quality of financial reports that are valued by the market in its price formation activity.

Details

International Journal of Accounting & Information Management, vol. 29 no. 4
Type: Research Article
ISSN: 1834-7649

Keywords

Article
Publication date: 6 January 2022

Heba Abou-El-Sood and Dalia El-Sayed

The authors investigate whether abnormal tone in corporate narrative disclosures is associated with earnings management and earnings quality, in an emerging market context. Based…

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Abstract

Purpose

The authors investigate whether abnormal tone in corporate narrative disclosures is associated with earnings management and earnings quality, in an emerging market context. Based on agency theory and opportunistic/impression management perspective, this study examines whether executives manage disclosure tone to support their opportunistic behavior, when using earnings management.

Design/methodology/approach

This study uses a sample of earnings press releases of publicly traded firms in the MENA region during 2014–2019. It employs textual analysis to measure disclosure tone. The authors estimate abnormal disclosure tone after controlling for firm characteristics. Discretionary accruals proxy for earnings management and are estimated using Modified Jones model. Earnings quality is measured using accounting-based and market-based proxies: earnings smoothness, persistence, predictability and value relevance/informativeness.

Findings

Results show a positive association between abnormal disclosure tone and earnings management. Additionally, results show that earnings persistence is higher for firms with lower levels of abnormal disclosure tone. Results are sustained for earnings smoothness, but not for predictability and value relevance/informativeness.

Research limitations/implications

Results provide initial evidence of management's use of tone management jointly with earnings management. This adds to prior studies adopting the opportunistic perspective of disclosure tone, through showing that discretionary tone in narrative disclosures can be strategically used by management to influence investors' perceptions.

Practical implications

The results provide valuable insight to board of directors, auditors and market participants on the possible biases emerging from tone of narrative disclosures in corporate reports. For regulators and standard-setters, results shed light on the need for regulations and rules beyond financial statements, to guide disclosure of narrative information in different corporate reports.

Originality/value

This study contributes to the rare evidence that investigates textual disclosure characteristics to uncover management's opportunistic practices and assess earnings quality. Where majority of studies concentrate on developed markets, this study provides novel evidence of emerging markets by examining the association between abnormal disclosure tone and earnings management/earnings quality. Also, it validates the tone management model proposed by Huang et al. (2014) for capturing tone manipulation.

Details

Journal of Applied Accounting Research, vol. 23 no. 2
Type: Research Article
ISSN: 0967-5426

Keywords

Article
Publication date: 29 June 2021

Shin-Rong Shiah-Hou

This study explores the effect of CEO power on earnings quality. If powerful CEOs make the information environment more opaque, they can easily conceal information to hide…

Abstract

Purpose

This study explores the effect of CEO power on earnings quality. If powerful CEOs make the information environment more opaque, they can easily conceal information to hide self-dealing behavior through earnings manipulation. Conversely, if powerful CEOs who are well-protected create a transparent information environment, they will provide better quality earnings.

Design/methodology/approach

The author constructs a composite index for CEO power by combining seven CEO characteristics and employs two variables including discretionary accruals and earnings response coefficient as proxies for earnings quality.

Findings

The author’s main results show a significant negative relation between CEO power and the firm's earnings quality. In addition, CEOs with stronger structural power and expert power are more likely to generate lower earnings quality, while those with stronger ownership power are more likely to provide higher earnings quality.

Originality/value

The findings suggest that CEO power reduces the firm's earnings quality because CEOs with structural power or expert power may destroy governance monitoring mechanisms.

Details

Managerial Finance, vol. 47 no. 12
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 11 April 2008

Charles A. Barragato and Ariel Markelevich

The paper aims to examine earnings quality during the post‐acquisition period.

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Abstract

Purpose

The paper aims to examine earnings quality during the post‐acquisition period.

Design/methodology/approach

The paper defines earnings quality as an earnings stream more closely associated with future cash flows from operations. It uses the stock market's reaction at the acquisition announcement to infer merger motives and hypothesize that synergy‐motivated acquisitions will produce higher quality earnings than agency‐motivated acquisitions.

Findings

The paper finds that synergy‐motivated acquisitions produce higher quality earnings than agency‐motivated acquisitions.

Research limitations/implications (if applicable)

The findings are consistent with this prediction and support the view that managers who pursue synergy or agency‐motivated acquisitions do not face the same economic environment and incentive schemes. The results are also consistent with the notion that incentives for earnings management are greater following agency‐motivated acquisitions when compared to those of synergy‐motivated acquisitions. The authors conjecture that these differences originate from those accounting‐based contracts that are likely impacted by reported post‐acquisition balance sheet and income statement amounts.

Practical implications

The findings of the paper show that the motive for the acquisition has lasting effect, several years post acquisition on the quality of earnings produced by the merged entity; thus furnishing additional importance to identifying the motive for the acquisition.

Originality/value

The paper uses the corporate acquisition setting to examine earnings quality during the post‐acquisition period. This paper should be relevant for researchers studying either the quality of earnings or corporate acquisitions.

Details

Managerial Finance, vol. 34 no. 5
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 21 January 2021

Ahmed Yamen, Cemil Kuzey and Muhammet Sait Dinc

This paper examines the link between culture, institutional quality and real earnings management and accrual earnings management by combing the study by Hofstede (2001) and…

Abstract

Purpose

This paper examines the link between culture, institutional quality and real earnings management and accrual earnings management by combing the study by Hofstede (2001) and Enomoto et al. (2015). The paper tries to test the effect of culture on institutional quality and both real earnings management (REM) and accrual earnings management (AEM).

Design/methodology/approach

The sample of the research paper includes 38 countries. Hofstede cultural dimensions are used to measure cultural values. Public governance indicators published by the World Bank are used as a proxy for measuring the institutional quality. Earning management scores constructed by Enomoto et al. (2015, p. 191) are used for measuring real earnings management (REM) and accrual earnings management (AEM). Partial Least Square (PLS) based Structural Equation Modelling (SEM) is used to test the relationship between culture, institutional quality and earnings management.

Findings

The results support the relationship between culture and institutional quality. Also, the results reveal a significant relationship between culture and accrual earnings management, but an insignificant relationship between culture and real earnings management. In addition to that, another important finding is that institutional quality has a significant impact on real earnings management, but has no significant effect on accrual earnings management.

Practical implications

The results suggest that standard setters need to consider the quality of institutions to improve the quality of financial reports. Also, it highlights the role of both formal and informal cultures in shaping financial reports.

Originality/value

For the best of our knowledge, this the first time to test the link between culture and institutional quality and comparing the impact on both real earnings management and accrual earnings management.

Details

EuroMed Journal of Business, vol. 17 no. 1
Type: Research Article
ISSN: 1450-2194

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 about the…

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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: 4 April 2017

Mohammad Badrul Muttakin, Arifur Khan and Dessalegn Getie Mihret

This study aims to investigate the moderating role of audit quality on the association between business group affiliation of firms and earnings management in the South Asian…

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Abstract

Purpose

This study aims to investigate the moderating role of audit quality on the association between business group affiliation of firms and earnings management in the South Asian emerging economy of Bangladesh.

Design/methodology/approach

A usable sample of 917 firm-year observations was drawn from companies listed on the Dhaka Stock Exchange from 2005 to 2013. Data were collected from the annual reports of sample companies. Earnings management was measured using the absolute value of discretionary accruals, and two proxies were used to measure audit quality: auditor size and industry specialisation.

Findings

Results showed that the level of discretionary accruals is positively associated with business group affiliation status, and higher audit quality reduces this association. This suggests that in environments without strong investor protection, complex ownership structures create opportunities for controlling shareholders to expropriate minority shareholders. The controlling shareholders could then mask this practice through earnings management. The findings also show that in environments lacking strong investor protection, audit quality can help improve earnings quality for group-affiliated firms.

Practical implications

The results suggest that financial statement users need to consider audit quality for a reasonable evaluation of the earnings quality of business groups. The study also informs regulators by illuminating audit quality as a key area of focus in any effort directed at enhancing stock market efficiency through improved earnings quality in environments where business group affiliation is prevalent.

Originality/value

This study documents empirical evidence on the moderating effect of audit quality on the positive association between business group affiliation and earnings management.

Details

Managerial Auditing Journal, vol. 32 no. 4/5
Type: Research Article
ISSN: 0268-6902

Keywords

21 – 30 of over 24000