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Article
Publication date: 24 October 2020

Quang-Anh Le and Cheng-Yu Lee

This study aims to analyze the link between earnings pressure and R&D cut as well as the moderating effects of family control and debt.

Abstract

Purpose

This study aims to analyze the link between earnings pressure and R&D cut as well as the moderating effects of family control and debt.

Design/methodology/approach

In total, 6,130 firm-year observations of Taiwanese-listed firms were used to test the hypotheses by using a panel data regression with fixed effects estimation.

Findings

The study reveals that earnings pressure is positively related to R&D cut, and this relationship can be softened when having the presence of family control and debt.

Research limitations/implications

This study is conducted based on some conditions: data collection comes from a single source, earnings pressure mainly comes from analysts, R&D intensity is significant among industries, debt is a given condition to managers. Future studies, thus, are suggested to use other approaches to have further information and extend the knowledge without these conditions.

Practical implications

Under the pressure of meeting analyst forecast, managers have more opportunities to flourish their priority on improving temporary profits rather than implementing R&D investments with costly budget but unpredictable outcomes. In addition to responding to the positive effect of earnings pressure on trimming long-term corporate investments, this study also found some corporate governance mechanisms to soften the managerial short-termism behavior.

Originality/value

The findings partially contribute to broadening the existing knowledge base on the impact of earnings pressure on corporate activities and how some mechanisms serve as moderators.

Details

Management Research Review, vol. 44 no. 4
Type: Research Article
ISSN: 2040-8269

Keywords

Article
Publication date: 26 June 2009

C.S. Agnes Cheng and Austin Reitenga

The purpose of this paper is to examine the differential effects of institutional non‐blockholders (NONB) and active institutional blockholders (ACTB) on earnings management…

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Abstract

Purpose

The purpose of this paper is to examine the differential effects of institutional non‐blockholders (NONB) and active institutional blockholders (ACTB) on earnings management behavior, as measured by discretionary accruals.

Design/methodology/approach

This paper also proposes that the hypothesized influence of NONB and ACTB on earnings management behavior is affected by earnings pressure (EP) (i.e. the gap between target earnings and pre‐managed earnings). In particular, it believes that the stimulating effect of NONB on earnings management may not manifest when the stimulating effect of EPs is already strong and the mitigating effect of ACTB may manifest only when the stimulating effect of EP is there. The sample into three EP conditions: pressure to increase earnings, neutral pressure and pressure to decrease earnings is grouped. Consistent with the expectations, the paper finds that NONB stimulates earnings management, but only when EP is not strong and that ACTB mitigates earnings management, but only when there is pressure to increase earnings.

Findings

This paper also predicts that ACTB will need to exercise their monitoring power only when EP is strong. The results confirm this prediction, but only when there is strong pressure to increase earnings. When there is strong pressure to decrease earnings, inconclusive evidence regarding the effect of ACTB is found. This may imply that ACTB are conservative since they appear to be more likely to limit income‐increasing accruals than they are to limit income‐decreasing accruals.

Originality/value

This paper's contributions to the literature are twofold: the paper shows that the characteristics of institutional investors (INSTs) should be considered when examining the relationship between INSTs and earnings management; the paper shows that the direction and level of EP should be considered when evaluating the relationship between INSTs and earnings management.

Details

International Journal of Accounting & Information Management, vol. 17 no. 1
Type: Research Article
ISSN: 1834-7649

Keywords

Book part
Publication date: 10 June 2009

Joann Segovia, Vicky Arnold and Steve G. Sutton

Multiple stakeholders in the financial reporting process have articulated concerns over the rules-based orientation that U.S. accounting standards have adopted. Many argue that a…

Abstract

Multiple stakeholders in the financial reporting process have articulated concerns over the rules-based orientation that U.S. accounting standards have adopted. Many argue that a more principles-based approach to standards setting, typified by international accounting standards, would improve the quality of financial reporting and strengthen the auditor's position when dealing with client pressure, thereby enabling a focus on transparency and fairness of financial reports. In early 2009, the U.S. appeared poised to transition U.S. accounting standards to international accounting standards. The transition decision was made after the recommendations of the SEC Advisory Committee on Improvements to Financial Reporting (i.e., SEC Pozen Committee) publicly expressed strong support in its final report (SEC, 2008a). The SEC in turn issued its “Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers on November 14, 2008” (SEC, 2008b) outlining the transition procedures. However, with Shapiro taking over as chairperson of the SEC, this move now appears less likely pending a stronger review of how principles-based international standards may impact the strength of financial regulatory oversight – a potential delay met with disdain by the pro principles-based European regulatory community (Doran, 2009). While transition to international standards continues to progress, little research examining whether principles-based standards affect auditor decision-making has been conducted. The purpose of this study is to explore the impact of principles- vs. rules-based standards on auditors' willingness to allow preparers leeway in reporting practices and to consider how auditors' decision behavior is influenced by potential client pressure and/or opposing pressure from the SEC. Based on a sample of 114 experienced auditors, the results show that auditors are more willing to allow clients to manage earnings under rules-based standards; and, these results are persistent even under external pressure. Results also indicate that more experienced auditors are less willing to allow clients who exert high pressure to report earnings aggressively, while SEC pressure has more affect on less experienced auditors. These results provide important insights to the FASB, SEC, and IASB as they weigh arguments underlying the principles- vs. rules-based debate.

Details

Advances in Accounting Behavioral Research
Type: Book
ISBN: 978-1-84855-739-0

Book part
Publication date: 30 September 2019

Masumi Nakashima

This study focuses on a survey of chief financial officers (CFOs) in public firms in Japan concerning the following six points: the importance of the definition earnings quality;…

Abstract

This study focuses on a survey of chief financial officers (CFOs) in public firms in Japan concerning the following six points: the importance of the definition earnings quality; higher quality earnings; the determinants of earnings quality; prevalence, magnitude, and motivation of earnings management; accounting that influences earnings quality; and misrepresenting of earnings. The results are following: first, Japanese CFOs define earnings quality as earnings accurately reflecting economic reality, earnings accurately reflecting the results of operations, and earnings backed by cash flows, earnings sustainability, recurring, and consistent, and earnings reflecting long-term trend importance. Second, Japanese firms consider earnings that reflect consistent reporting choices over time as higher quality. They do not consider that earnings having accruals that are eventually realized as cash flow as higher earnings quality. Third, Japanese CFOs indicate that 30% of earnings quality is impacted by firm characteristics such as firm’s business model, industry, and macroeconomic conditions. Surprisingly, the influence of the board of directors is greater than the impact of their internal controls. Fourth, as for the determinants of earnings quality, CFOs consider that more than 70% of Japanese CFOs do not allow the discretion and that accounting standards limit their ability to report higher earning quality. Fifth, Japanese CFOs consider that higher earnings are influenced by accounting principles such as policies that match expenses with revenues and policies that rely on fair value accounting as much as possible. Sixth, CFOs themselves predict that 50% of Japanese firms use discretions and that they use 20% of earnings per share (EPS). Since there is inside and outside pressure to hit earnings benchmarks, Japanese firms possess the motivation to use earnings to misrepresent economic performance, Japanese managers see a red flag when generally accepted accounting principle’s earnings do not correlate with cash flow from operations.

Details

Research on Professional Responsibility and Ethics in Accounting
Type: Book
ISBN: 978-1-78973-370-9

Keywords

Article
Publication date: 18 May 2021

Daoguang Yang, Jiani Wang and Hanwen Chen

This study aims to investigate whether and how earnings guidance affects corporate innovation.

Abstract

Purpose

This study aims to investigate whether and how earnings guidance affects corporate innovation.

Design/methodology/approach

Exploiting the setting of China, where the Shenzhen Stock Exchange has required all public firms listed on its ChiNext board to issue earnings guidance since 2012, this study uses a difference-in-differences (DID) methodology to examine the effect of earnings guidance on corporate innovation and further conducts cross-sectional analyzes from the information risk and monitoring demand perspectives. Moreover, the authors conduct path analysis to verify the possible channels through which corporate innovation is impeded by market pressure or improved through increased corporate transparency.

Findings

This study documents a positive relationship between earnings guidance and corporate innovation, as measured by the number of invention patents, indicating that the “corporate governance” hypothesis dominates in China. Cross-sectional analyzes show that this positive effect is more pronounced for firms subject to greater information risk and monitoring demand. Finally, the path analysis further confirms that earnings guidance improves innovation by increasing corporate transparency.

Practical implications

First, this study captures the bright side of mandatory earnings guidance and suggests that increasing the disclosure frequency can yield benefits for firms. Second, the findings imply that regulations, regardless of what they refer to, should be based on a country’s specific context.

Originality/value

First, this study provides evidence supporting the “corporate governance” argument based on the context of China and, thus contributes to the debate on earnings guidance. Second, this study enriches the literature on the economic consequences of earnings guidance. Third, the study extends research on the determinants of corporate innovation.

Details

Nankai Business Review International, vol. 12 no. 3
Type: Research Article
ISSN: 2040-8749

Keywords

Article
Publication date: 28 January 2020

Shathees Baskaran, Nalini Nedunselian, Chun Howe Ng, Nomahaza Mahadi and Siti Zaleha Abdul Rasid

This study aims to clarify the relationship between ethical orientation and earnings management perception phenomenon in the organization. It discusses to what extent earnings

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Abstract

Purpose

This study aims to clarify the relationship between ethical orientation and earnings management perception phenomenon in the organization. It discusses to what extent earnings management is considered as a strategic adaptation or deliberate manipulation in an organization. The study also aims to expand the domain of ethical perspective of earnings management by considering mediating and moderating role of investor sentiment and corporate social responsibility (CSR) as inward pressure and outward commitment surrounding the organization, adopting a combined perspective of strategic management and also accounting discipline than is normally found in the ethics and earnings management literature.

Design/methodology/approach

The study opted for literature synthesis to define key concepts surrounding ethics and earnings management perception in the organization. Besides, it attempted to identify influential mediators and moderators in explaining the earnings management phenomenon in the organization. Consequently, the study identified the gaps in current research to draw upon a more holistic conceptual framework. The rationale for the research was justified within the body of research.

Findings

The study suggested research propositions based on the literature synthesis in view of ethics and earnings management perception in the organization. More specifically, it has proposed a conceptual framework, explaining the relationship between ethical orientation and a multi-dimensional view of earnings management perception. It is envisaged that the mediating and moderating role of investor sentiment and CSR incorporated in this conceptual study will improve the predictive value of the proposed framework and offer additional insights about factors that inhibit or advance ethical orientation and earnings management practices in the organization.

Research limitations/implications

This paper suffers from the obvious limitation of lacking empirical investigation. However, it does provide a theoretical rationale for the argument that alteration of earnings can be controlled if ethical orientation is emphasized in the organization apart from insulating internal and external pressures to manage such phenomenon from happening in the organization. Perhaps, the most important direction for future research is further extension and validation of this framework by performing an empirical investigation to produce newer insights into this phenomenon.

Originality/value

This conceptual study is different from previous studies on the grounds it has considered unexplored issues linking inward pressures and outward commitments in explaining this phenomenon further. To bridge the critical knowledge gap of earnings management phenomenon, a mediating effect of investor sentiment as an inward pressure and a moderating role of CSR as an outward commitment are also integrated within the model. The proposed model neither formulated nor tested empirically in previous studies locally or, perhaps, globally, therefore, stands out as an original contribution in the study of ethical orientation and earnings management perception.

Details

Journal of Financial Crime, vol. 27 no. 2
Type: Research Article
ISSN: 1359-0790

Keywords

Article
Publication date: 17 May 2011

Li Xu and Alex Tang

The purpose of this paper is to examine the timing and the determinants of electing Statement of Financial Accounting Standard (SFAS) No. 159 in the banking industry.

Abstract

Purpose

The purpose of this paper is to examine the timing and the determinants of electing Statement of Financial Accounting Standard (SFAS) No. 159 in the banking industry.

Design/methodology/approach

The authors hypothesize certain factors that will potentially affect banks' election decisions and separate banks into three groups: early electors, late electors and non‐electors by hand‐collecting the election decisions and the timing of the election decisions. Univariate and logit rank regressions are used to identify the determining factors between electors (vs non‐electors) and between early electors (vs late electors).

Findings

The authors find that compared to banks not electing SFAS No. 159 (non‐electors), banks electing SFAS No. 159 (early electors as well as late electors) face greater earnings pressures, have less volatile earnings and larger size, and are active in hedging activities. In addition, compared to banks electing SFAS No. 159 at required election date (late electors), banks electing SFAS No. 159 early (early electors) have weak financial strength, less volatile earnings, and are more likely to be audited by non‐Big‐4 auditors.

Research limitations/implications

The study only focuses on the banking industry, so the results from may not be generalized to other industries. Future studies could explore how SFAS No. 159 impacts firms in different industries.

Originality/value

The authors' overall results suggest that the banks might have many considerations in mind when they elect to use SFAS No. 159. The results provide useful information for regulatory bodies to evaluate the efficacy of issuing the standard. Early electors could have exploited the opportunities provided by the transition provisions of this standard to boost their regulatory capital ratios.

Details

Review of Accounting and Finance, vol. 10 no. 2
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 2 September 2019

Abir Jerbi Maatougui and Khamoussi Halioui

The purpose of this study is to test the effect of the presence of outside blockholders on earnings management around seasoned equity offerings (SEOs).

Abstract

Purpose

The purpose of this study is to test the effect of the presence of outside blockholders on earnings management around seasoned equity offerings (SEOs).

Design/methodology/approach

Given that SEO can be one of motivations for earnings management, the authors examined the role of outside blockholders in monitoring the opportunistic behavior of managers around 50 SEOs realized by 45 French companies during the 2005-2009 period based on panel data model.

Findings

The authors found that issuing firms are used for upward earnings management during the pre-offering period. Indeed, the discretionary accruals know a continuous evolution during the three years preceding SEO and peaked in the year prior to the SEO. This result led us to examine the role played by the outside blockholders on earnings management. The results provided empirical evidence that the presence of outside blockholders in SEO firms is able to restrain earnings management practices.

Research limitations/implications

This study allows to inform investors that French issuing firms are less overvalued in the presence of outside blockholders than in their absence. As a result, investors have an interest in participating in the SEO of firms that hold outside blockholders in their capital structure. Again, based on this study, users of financial statements can trust the reliability of the financial statements published by companies with outside blockholders because of the careful control exercised by these shareholders in the process of producing financial information. However, similar to how any research may suffer from some limitations, this work has two major limitations. Firstly, the authors examined the impact of outside blockholders on earnings management without distinguishing between the different types of blockholders (such as individual investors, pension funds, mutual funds, banks and trusts). Secondly, they have estimated the discretionary accruals by referring to a single model (Kothari et al., 2007). However, the use of two or more models for estimating accruals will lead to more robust results.

Originality/value

The empirical literature emphasizes the monitoring role played by these shareholders on earnings management. However, it does not distinguish between the circumstances when the monitors either lose or win from exaggerations. This research completes this lack by studying the impact of outside blockholders on earnings management around SEOs.

Details

Journal of Financial Reporting and Accounting, vol. 17 no. 3
Type: Research Article
ISSN: 1985-2517

Keywords

Article
Publication date: 17 July 2013

Jun Han

Researchers have long been interested in understanding why and how corporate managers issue earnings guidance and the effect of such guidance on stakeholders’ (investors’ and…

Abstract

Researchers have long been interested in understanding why and how corporate managers issue earnings guidance and the effect of such guidance on stakeholders’ (investors’ and managers’) behavior. Several recent studies have employed the experimental approach to address these issues. The purpose of this paper is to analyze and synthesize the literature on experimental studies of management earnings guidance. Consistent with the literature, I organize the synthesis to reflect (a) whether, why and how management issues guidance; (b) investors’ reactions to guidance; (c) the effect of guidance on management behavior. In addition, I provide institutional information (e.g., nature and timing of guidance) about guidance as well as provide several directions for future research. The synthesis reveals that the experimental studies have made a unique contribution to this literature by (i) providing evidence on process variables that underlie some empirical associations, (ii) directly measuring managers’ personal attributes and, (iii) closing the causality gap in the guidance literature.

Details

Journal of Accounting Literature, vol. 31 no. 1
Type: Research Article
ISSN: 0737-4607

Keywords

Article
Publication date: 1 January 2004

Rafik Z. Elias

Earnings management behavior has been a concern in the accounting profession for a long time. This study surveyed 583 certified public accountants (CPAs) in public accounting…

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Abstract

Earnings management behavior has been a concern in the accounting profession for a long time. This study surveyed 583 certified public accountants (CPAs) in public accounting, industry and academia to determine if there is a link between corporate ethical values and perception of earnings management. Selected earnings management scenarios were mailed to the respondents before high‐profile bankruptcies became public information. The results indicated that CPAs employed in organizations with high (low) ethical standards viewed earnings management activities as more unethical (ethical). Within‐group analyses of the respondents also found significant differences on the perception of corporate ethical values based on gender, age, job title and other demographic factors. The results indicated that there were early warning signals in the accounting profession regarding ethical values and earnings management. The results were particularly alarming among CPAs employed in industry who reported lower perception of their corporate ethical values.

Details

Managerial Auditing Journal, vol. 19 no. 1
Type: Research Article
ISSN: 0268-6902

Keywords

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