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The purpose of this paper is to try to identify the motivation of firms that announce share repurchase but do not follow it up with the actual purchase. The authors conjecture that the long-term earnings quality of such firms is low, which makes them poor candidates for actual stock repurchase. Their intention is to mimic actual repurchasers and their motivation appears to be just to get a bounce in their stock price normally associated with such announcements.

The authors use probit analysis to ascertain whether earnings quality can predict the subsequent repurchase behavior of firms that announce share repurchase. As Gong et al. point out, the relationship between earnings management and the percentage of shares repurchased may be endogenous. In order to mitigate the potential endogeneity bias, the authors use a two-stage instrumental variable probit model adapted for this study from Lee and Masulis (2009).

The results show that non-carry-through firms have lower earnings quality than carry-through firms in the pre-announcement period in all of the metrics the authors use to measure earnings quality. In the post-announcement period, the earnings quality of the non-carry-through firms declines still further and the difference in the quality becomes more pronounced. The results of probit regression show that lower earnings quality increases the likelihood of becoming a non-carry-through company.

The finding has interesting implications for investment management as investors can differentiate non-carry-through firms from carry-through repurchasers by examining the firm's earnings quality.

The analysis shows that poor long-term earnings quality increases the chance of not carrying through on the repurchase announcement. The authors also find that the poor earnings quality of non-carry-through firms limits their ability to manage earnings downward prior to the repurchase announcement.

The purpose of this paper is to investigate the role of acquirer's earnings quality on the choice of payment method in mergers and acquisitions (M&A).

The paper applies a simultaneous equations model to address the concern of endogeneity between earnings quality and payment method in corporate acquisitions. In addition, a propensity score matching model is used for robustness purpose.

Previous studies imply that short‐term accruals have a significant impact on the choice of payment method in M&A. In this study, This paper shows that acquisition financing is not significantly affected by short‐term earnings quality once control variables are considered. Instead, this paper finds that it is the long‐term earnings quality of the acquirer that matters. Acquiring firms with poor (good) long‐term earnings quality prefer lower (higher) cash payment in acquisitions. Their results are robust to different definitions of earnings quality.

Researchers should consider the effect of long‐term earnings quality in their future investigations.

Investors should be aware of this issue when evaluating corporate mergers.

This is the first study to examine the impact of long‐term quality of earnings on the choice of payment method in M&A.

The aim of this study is to investigate whether debt maturity matters for the choice of earnings management strategy (i.e. accruals earnings management and real earnings management).

The sample involves 486 American listed firms extracted from fortune 1,000 over the period 2006–2014. Panel data regression models are employed to empirically test the impact of short-term debt and long-term debt on manager's choice of earnings management form. The generalized least square technique is applied to estimate the parameters of the regression models.

The results show that managers are more likely to manage earnings through real activities and reduce their use of accruals earnings management once short debt is increasing because the latter induces heavy lender's scrutiny. The managers move hence to real earnings management due to a lower possibility of being discovered. Moreover, the results reveal a simultaneous use of accruals earnings management and real earnings management for firms with high long-term debt. This finding highlights that long-term debt does not produce regular lender's enforcement allowing managers to use both earnings management techniques to reach earnings targets.

This research has two limitations. Like many other studies, the measure of discretionary accruals is subject to measurement errors. Moreover, the sample exclusively involves large firms extracted from Fortune 1,000. Therefore, the attained results may be not available for small and medium firms.

The findings have implications for both researchers and lenders. For researchers, the present work points out that the decision about the debt maturity structure is crucial for all managers because they establish their earnings management policy accordingly. For lenders, the findings imply that increasing scrutiny effectively constrains accounting manipulations but does not eliminate earnings management activities altogether. The managers move to another earnings management strategy (i.e. real earnings management). This evidence may support the lenders and the creditors in their decision-making processes.

This paper adds to the accounting literature by providing new and interesting evidence on the role of debt maturity on the trade-off between the earnings management tools. Prior studies provided mixed finding for the issue of earnings management in levered firms. The findings of this study should be viewed as a first step to understand the mixed results on this issue. While most papers focus on one earnings management form when they examine the earnings management in levered firms, the authors highlight the impact of debt on both accruals and real earnings management simultaneously.

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.

The purpose of this study is to investigate the long-term performance of firms that early adopted Statement of Financial Accounting Standard 142 (SFAS 142).

In particular, the paper focuses on a relatively lengthy time frame after the standard became effective in 2002 and examines whether the firms which early adopted SFAS 142 exhibit different characteristics from their non-early adopting counterparts when comparing operating returns, stock returns and earnings quality over the same time period. Profit margin, return on assets and return on equity are used to measure operating returns; buy-and-hold return, Tobin’s Q and price-to-book ratio are used to measure stock returns; and abnormal accruals and accruals quality are used to measure earnings quality.

Based on a sample of 692 firm-year observations over five years between 2002 and 2006, the authors find that early adopters tend to exhibit lower operating performance (most noticeable when measuring profit margin and return on assets) and lower earnings quality following the early adoption of SFAS 142 than non-early adopters. However, little relation is found between post-adoption market returns and the choice to early adopt SFAS 142.

This study helps fill the gap in accounting literature by investigating the long-term performance of firms post adoption of SFAS 142. The empirical results may provide greater understanding of the firms choosing to early adopt SFAS 142, and offer additional insight to guide standard setters on similar accounting issues in the future.

This study’s research questions attempt to identify potential differences in operating and stock performance and earnings quality by comparing early adopters and non-early adopters of SFAS 142 over a five-year period between 2002 and 2006, which extends the research beyond the relatively short window covered by prior research, and also takes into consideration Statement of Financial Accounting Standard 141 (SFAS 141)-R “Business Combination”, issued in 2007, to supersede SFAS 141 of 2001.

This paper aims to examine the impact of initial public offerings (IPO)-year opportunistic earnings management on long-term market and earnings performance.

A sample of 150 book-built IPOs over 2001-2006 are analysed based on industry adjusted return on sales and industry adjusted return on assets for six post-IPO years. The quality of earnings is measured in two ways using discretionary accruals and Beneish manipulation score. Modified Jones model is used to estimate the expected accruals and to compute the discretionary accruals for each IPO firm year. Regression model is used to examine the impact of IPO-year quality of earnings on future earnings performance.

The paper finds that earnings and market performance of IPO companies are abnormally higher in the IPO-year, as compared to the post-IPO years. Similarly, the quality of earnings during the IPO-year is lower than those in the post-IPO years. The results also show that the opportunistic earnings management in IPO-year has significant negative impact on the long-term adjusted earnings and market performance.

The present study is confined to the period from 2001 to 2006 for the purpose of post-IPO analysis for a period of six post-IPO years. Thus, the conclusions of this study are to be viewed with this limitation.

This paper is the first study based on the Indian context to examine the relationship between the quality of earnings of the IPO firm and long-term earnings and market performance.

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.

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.

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.

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.

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).

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.

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.

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.

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.

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.

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.

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.