Search results

1 – 10 of 123
To view the access options for this content please click here
Book part
Publication date: 18 September 2017

Raquel Meyer Alexander, Andrew Gross, G. Ryan Huston and Vernon J. Richardson

We investigate the interaction of debt covenants and tax accounting on the adoption of Financial Interpretation No. 48 (FIN 48). We examine how firms respond to the…

Abstract

We investigate the interaction of debt covenants and tax accounting on the adoption of Financial Interpretation No. 48 (FIN 48). We examine how firms respond to the potential tightening of covenant slack upon FIN 48 adoption and whether these actions are penalized by creditors and anticipated by equity markets. We find that upon FIN 48 adoption, the majority of sample corporate borrowers increase their tax reserves and reduce equity. Firms close to debt covenant violation were even more likely to increase tax reserves upon FIN 48 adoption; however, the size of the adjustment was relatively smaller, suggesting that the FIN 48 standards limited, but did not eliminate, firms use of discretion in reporting uncertain tax positions to avoid costly covenant violations. For firms near net worth debt covenant violation, the act of decreasing equity upon FIN 48 adoption imposes real economic costs, as the average cost of debt increased by 43 basis points. Finally, we extend prior research on the market response to FIN 48 by showing how the market response to FIN 48 adoption is a function of debt covenant slack and tax aggressiveness. Specifically, the cumulative abnormal return at the FIN 48 exposure draft release date is negative only for tax aggressive firms that are close to debt covenant violation.

Details

Advances in Taxation
Type: Book
ISBN: 978-1-78714-524-5

Keywords

To view the access options for this content please click here
Article
Publication date: 20 June 2020

Daniel Gyung Paik, Joyce Van Der Laan Smith, Brandon Byunghwan Lee and Sung Wook Yoon

The purpose of this study is to investigate the relationship between off-balance-sheet (OBS) operating leases and long-term debt by analyzing firms’ debt risk profiles…

Abstract

Purpose

The purpose of this study is to investigate the relationship between off-balance-sheet (OBS) operating leases and long-term debt by analyzing firms’ debt risk profiles measured by the constraints on firms in the financial ratios in their debt covenants.

Design/methodology/approach

This study determines debt risk profiles using three measures: the ex ante probability of covenant violation (Demerjian and Owens, 2016), firms in violation of debt covenants and firms close to covenant violations.

Findings

High-risk firms according to all three measures, on average, have a significantly lower level of operating leases, indicating that these firms use OBS leases as a substitute for long-term debt. Interestingly, for firms operating in industries in which leases are widely available, firms with a high probability of covenant violation have a significantly higher level of operating leases, indicating that these firms use OBS leases as a complement to long-term debt. Further analysis indicates that lease financing is less costly than debt financing for these firms.

Research limitations/implications

Overall, evidence of this study indicates that firms facing financial constraints may attempt to lease more of their assets, but the availability of leasing is constrained by their debt covenant obligations and the strength of the leasing market in its industry.

Originality/value

This study identifies states in which risky firms may treat leases as either complements or substitutes for long-term debt, implying that the leasing decision relates to the availability of an active leasing market for a firm’s assets and the firm’s financial constraints. The findings of this study support recent research showing that debt and leases are complementary in the presence of counterparty risk providing insight into the paradoxical relationship identified in prior research between leases and long-term debt.

Details

Review of Accounting and Finance, vol. 19 no. 3
Type: Research Article
ISSN: 1475-7702

Keywords

To view the access options for this content please click here
Article
Publication date: 22 February 2008

Yoonseok Zang

This study aims to examine whether managers use discretion in determining transitional goodwill impairment loss (initial impairment loss or IIL) upon the adoption of SFAS…

Abstract

Purpose

This study aims to examine whether managers use discretion in determining transitional goodwill impairment loss (initial impairment loss or IIL) upon the adoption of SFAS no. 142, Goodwill and Other Intangible Assets, and whether and how the market reacts to the impairment loss and to the absence of goodwill amortization.

Design/methodology/approach

Various empirical models are applied to a sample of 870 firms that completed the IIL test.

Findings

It is found that more highly leveraged firms (firms that have undergone a recent management change) report lower (greater) goodwill impairment. Stock return is not associated with a boost in earnings caused by elimination of goodwill amortization, but it is negatively associated with an unexpected IIL, with the association being stronger for highly leveraged firms. Subsequently, analysts revise earnings forecasts for upcoming quarters downward in response to the unexpected IIL.

Research limitations/implications

Possibility of measurement errors in proxies is a caveat.

Practical implications

The findings are consistent with the strategic reduction of the goodwill impairment by management to avoid the violation of debt covenants and with the notion that new managers take a big bath so they can report higher earnings in the future. The market tests imply that unexpected IIL provides value‐relevant information about a negative view of the future profit‐making potential of the firm or an adverse impact on its debt contracts. No association with elimination of goodwill amortization can be interpreted as the market's anticipation or the lack of information content in goodwill amortization.

Originality/value

This research helps better understand the importance of managers' incentives in determining IIL as well as the stock market effect of the announcement of the IIL and the exclusion of goodwill amortization.

Details

Review of Accounting and Finance, vol. 7 no. 1
Type: Research Article
ISSN: 1475-7702

Keywords

To view the access options for this content please click here
Book part
Publication date: 19 October 2020

Kirsten Cook, Tao Ma and Yijia (Eddie) Zhao

This study examines how creditor interventions after debt covenant violations affect corporate tax avoidance. Using a regression discontinuity design, we find that…

Abstract

This study examines how creditor interventions after debt covenant violations affect corporate tax avoidance. Using a regression discontinuity design, we find that creditor interventions increase borrowers' tax avoidance. This effect is concentrated among firms with weaker shareholder governance before creditor interventions and among those with less bargaining power during subsequent debt renegotiations. Our results indicate that creditors play an active role in shaping corporate tax policy outside of bankruptcy.

To view the access options for this content please click here
Book part
Publication date: 18 September 2017

Abstract

Details

Advances in Taxation
Type: Book
ISBN: 978-1-78714-524-5

To view the access options for this content please click here
Book part
Publication date: 18 September 2017

Abstract

Details

Advances in Taxation
Type: Book
ISBN: 978-1-78714-524-5

To view the access options for this content please click here
Book part
Publication date: 9 June 2020

Michelle Priscilla and Sylvia Veronica Siregar

This study aims to analyze the effect of top management team (TMT) expertise on real earnings management (REM) and accrual earnings management (AEM) activities in…

Abstract

This study aims to analyze the effect of top management team (TMT) expertise on real earnings management (REM) and accrual earnings management (AEM) activities in companies in Indonesia by examining a hand-collected secondary data from non-financial publicly listed companies in Indonesia in 2016 and 2017. The expertise of TMT members is measured by possession of a master’s degree, understanding and experience of managed core functional areas, and possession of accounting certifications such as CA or CPA. The results of the study show that the expertise of the members of the TMT has no influence on the activity of AEM in companies in Indonesia. Meanwhile, understanding and experience on the managed core functional areas have a positive influence on REM activities through abnormal cash flows. Possession of accounting certification has a positive influence on REM activities in companies that are in accordance with managerial entrenchment effects, as well as a negative influence on REM activities in companies through abnormal discretionary expenses that are in line with incentive-reduction effects.

To view the access options for this content please click here
Article
Publication date: 11 February 2019

Jamel Chouaibi, Ghazi Zouari and Sawssen Khlifi

The purpose of this paper is to examine the effect of R&D intensity on the real earnings management index.

Abstract

Purpose

The purpose of this paper is to examine the effect of R&D intensity on the real earnings management index.

Design/methodology/approach

The authors proceed with dividing the full sample into two sub-samples, in accordance with the R&D associated intensity median. The final test sample proves to involve 73 firms along with 949 relating observations, while the control sample appears to enclose 65 firms and 845 relevant observations for the period 2000-2012.

Findings

The main finding of this study is the great influence of R&D intensity on the real earnings management index on the test sample. Accordingly, the proposed hypothesis stipulating that the innovative firms engage in upward real earnings management turns out to be strongly supported.

Research limitations/implications

The study was conducted using robust methods to test the effect of R&D intensity on the real earnings management index. The generalized least squares method was used to fit panel data and overcome heteroscedasticity and autocorrelation problems. The aim of the study was to prove the great effect of R&D intensity on the real earnings management index. As this study was based on data from American companies, the results cannot be generalized to all contexts.

Originality/value

This paper differs from previous work and tests the effect of innovative firms, the market-to-book ratio on real earnings management. The findings of this study will enrich the literature on real earnings management by suggesting R&D intensity that can significantly enhance the real earnings management index. Therefore, these findings will be helpful to investors, managers and regulators because they have implications for the interactive decision-making process.

Details

International Journal of Law and Management, vol. 61 no. 1
Type: Research Article
ISSN: 1754-243X

Keywords

To view the access options for this content please click here
Book part
Publication date: 8 September 2017

Hassan R. HassabElnaby, Ahmed Abdel-Maksoud and Amal Said

Decision-making rationality is said to be bounded by managers’ cognitive capabilities. Recent studies indicate that accounting functions evolved to augment the cognitively…

Abstract

Decision-making rationality is said to be bounded by managers’ cognitive capabilities. Recent studies indicate that accounting functions evolved to augment the cognitively bounded human brain in handling complex economic exchanges. The neuroscience discipline suggests that human brains have the ability to implement “automatic” processes of positive versus negative emotional stimuli to make rational decisions. Neuroscientific evidence shows that the activations in the ventral striatum decrease with negative emotional information/motives and increase with positive emotional information/motives. The authors, hence, argue that our understanding of the decision-making rationality in financial and managerial decisions could be enhanced by using a functional neuroimaging approach.

Decision-making rationality has been focal in debt covenant violation and earnings management research. The contracting theory predicts a relationship between managers’ decisions and the proximity of violating debt covenants. However, no prior research has investigated brain activities associated with the evaluation of debt covenant violation and earnings management. Meanwhile, in another strand of research, there is an extensive prior literature concerning the consequences of managers’ decisions and the use of accounting information in relation to their evaluative style, i.e., supervisory style. The authors argue that the relationship between the proximity to debt covenants violation and earnings management incentives is contingent upon managers’ supervisory style. However, no previous research has examined the impact of the supervisory style on earnings management in the context of the proximity to debt covenants violation and other earnings management incentives.

In this research note, we argue that neuroaccounting could be relied on to examine the relationship between the proximity to debt covenants and earnings management, contingent upon managers’ supervisory style, by capturing brain activities. The adoption of the neuroscience functional neuroimaging approach in this field should contribute to the understanding of managers’ behaviors and provide implications for research and practitioners. The goal of this research note is to provide a new avenue for future research in this field.

Details

Advances in Accounting Behavioral Research
Type: Book
ISBN: 978-1-78714-527-6

Keywords

To view the access options for this content please click here
Article
Publication date: 27 January 2020

Brandon Ater and Thomas Bowe Hansen

The purpose of this paper is to evaluate the extent to which firms manage earnings prior to private debt issuance.

Abstract

Purpose

The purpose of this paper is to evaluate the extent to which firms manage earnings prior to private debt issuance.

Design/methodology/approach

This is an empirical archival research paper using financial statement data and data related to private debt issuance.

Findings

The results indicate that, on average, firms engage in income-increasing earnings management in the period prior to a new private debt issuance. In addition, it was found that this income-increasing earnings management is limited to firms which have engaged in income-increasing earnings management to a greater extent in prior years.

Research limitations/implications

This paper provides insight into how managers’ balance competing incentives to use income-increasing earnings management to obtain more favorable lending terms, and to use income-decreasing earnings management to reduce the risk of a future debt covenant violation. The results indicate that firms’ incentive to use income-increasing earnings management dominates. However, reputational concerns significantly constrain firms’ earnings management decisions prior to private debt issuance.

Originality/value

The paper fills a notable void in the literature by investigating firms’ earnings management activity prior to private lending agreements, and thereby provides new insights into both the relation between private debt and accounting quality, and the literature investigating the use of earnings management to avoid debt covenant violations.

Details

Accounting Research Journal, vol. 33 no. 2
Type: Research Article
ISSN: 1030-9616

Keywords

1 – 10 of 123