Search results

1 – 10 of 121
Article
Publication date: 19 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 measured by…

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

Article
Publication date: 18 June 2021

Ca Nguyen and Alejandro Pacheco

This study has two primary objectives. First, it analyzes the information content of confidentiality strictness in corporate loan credit agreements. Second, it examines how…

Abstract

Purpose

This study has two primary objectives. First, it analyzes the information content of confidentiality strictness in corporate loan credit agreements. Second, it examines how confidentiality strictness impacts covenant design, lending syndicate structure and loan pricing.

Design/methodology/approach

Using a sample of 6,327 loan credit agreements originated by US public firms in the period of 1996–2017, this study measures the confidentiality strictness in loan contracts using textual analyses that capture the appearance of confidentiality-related words and the length of confidentiality provision. All regressions include relevant loan characteristics, firm-specific accounting variables, industry and year fixed effects. To address the endogeneity concern, the paper uses borrowing firms' rival cash holdings and R&D expenditures to instrument for confidentiality strictness in two-staged least square regressions.

Findings

Borrowers which have higher R&D and operate in more competitive product markets have tighter confidentiality policies. Furthermore, this study reveals that confidentiality strictness is negatively associated with the imposition of financial covenants, especially performance covenants. Loan contracts for borrowers with stricter confidentiality on average have more relaxed covenant intensity, measured by the number of covenants. The study also shows that stricter confidentiality attracts finance companies, which have strong expertise in product markets of their parent firms, into the lending syndicate. However, confidentiality-conscious borrowers with higher degree of information asymmetry are subject to higher loan spreads.

Originality/value

This study provides the first examination of confidentiality policies in loan contracts and supports the idea that loan provisions are not simply made of “boilerplate” language. The results suggest that, for confidentiality-sensitive borrowers, the greater exposure to product market competition helps control managerial slack and substitute monitoring from financial markets.

Details

International Journal of Managerial Finance, vol. 18 no. 2
Type: Research Article
ISSN: 1743-9132

Keywords

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 no. 142…

1744

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

Article
Publication date: 17 April 2023

Manish Bansal

The study aims to investigates which form of classification shifting is preferred by firms to avoid the violation of debt covenants and whether the higher-audit quality…

Abstract

Purpose

The study aims to investigates which form of classification shifting is preferred by firms to avoid the violation of debt covenants and whether the higher-audit quality constraints the shifting practices of firms incentivized to avoid covenant violations or not.

Design/methodology/approach

A sample of 1,644 Bombay Stock Exchange (BSE)-listed firms during the period 2009–2021 has been used in this study and tested through panel data regression models. Two forms of classification shifting, namely expense shifting and revenue shifting have been taken into account. The findings are validated through the propensity-score matching technique.

Findings

The findings deduced from the empirical evidence demonstrate that firms prefer revenue shifting over expense shifting to avoid covenant violations, consistent with the notion of the ease-need-advantage-based shifting framework, where firms are found to prefer a shifting tool with greater relative advantage. Further, the author finds that superior audit quality has a constraining effect on expense shifting, but not on revenue shifting, indicating the partial effectiveness of high-quality auditors in curbing the corporate misfeasance of classification shifting. These results are robust to the problem of endogeneity and self-selection bias.

Originality/value

The paper provides new evidence on debt market incentives behind classification shifting, where firms are found to substitute classification shifting forms to avoid covenant violations. Further, the study is among pioneering attempts to investigate the impact of audit quality on revenue shifting and document the non-constraining effect.

Details

Managerial Finance, vol. 49 no. 10
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 6 June 2023

Manish Bansal

To report inflated operating performance indicators, such as operating revenue and operating profit, managers vertically reposition revenue and expense items inside the income…

Abstract

Purpose

To report inflated operating performance indicators, such as operating revenue and operating profit, managers vertically reposition revenue and expense items inside the income statement. This study aims to investigate the relationship between credit market incentives and these practices.

Design/methodology/approach

This study examined a sample of 1,592 Bombay Stock Exchange-listed companies from 2009 to 2021 and tested them using panel data regression models. The propensity score matching method and different measurements of classification shifting practices are used to validate the results.

Findings

The conclusions drawn from the empirical data show that firms prefer revenue shifting over expense shifting to prevent debt covenant violations. It shows that the firm’s classification-shifting practices are driven by credit market incentives. This finding is consistent with the notion of positive accounting theory that firms engage in classification shifting (earnings management) to avoid violation of debt covenants. Further, the firm’s preference for revenue shifting is in line with the ease-need-advantage-based shifting framework where firms choose the shifting tool based on costs and constraints associated with each tool.

Practical implications

The finding suggests that if managers heavily rely on revenue shifting to avoid debt covenant violations, the firm may end up breaking these covenants based on its actual operating performance. Managers may use aggressive accounting techniques to prevent covenant violations, which can be a warning indicator of financial difficulties or operational problems. It highlights the necessity for creditors and investors to carefully evaluate a company’s financial stability outside of the financial statements that are publicly disclosed. Authorities should create separate forensic accounting standards for auditors to check revenue items and stop the corporate misfeasance of revenue shifting.

Originality/value

The study is among the earlier attempts to provide empirical evidence on credit market incentives behind classification shifting practices. It is the first study that documents the substitution relationship between classification shifting forms for avoiding violation of debt covenants.

Details

International Journal of Accounting & Information Management, vol. 31 no. 3
Type: Research Article
ISSN: 1834-7649

Keywords

Article
Publication date: 13 September 2021

Amira Houaneb, amira Houaneb, Rim Ben Hassen and Dorra Talbi

The purpose of this paper is to investigate the relationship between restrictive covenants and accounting conservatism. More specially, the authors try to explain how the use of…

Abstract

Purpose

The purpose of this paper is to investigate the relationship between restrictive covenants and accounting conservatism. More specially, the authors try to explain how the use of restrictive covenants of public debt may affect accounting conservatism.

Design/methodology/approach

The sample is composed of non-financial firms and for each firm one debt contract is considered. The authors have used the Ball and Shivakumar (2005) models to test the relationships. All variables were retrieved from Mergent Fixed Investment Securities and COMPUSTAT Databases.

Findings

The findings of this study show that the more the firm relies on bond covenants, the higher is the degree of conservatism. The authors found also that these firms also exhibited a widely significantly increased level of conservatism in the years following the issuance of debt.

Research limitations/implications

The results should be interpreted with caution because the use of covenants does not take into consideration the tightness of their inclusion in the public debt contract.

Originality/value

This paper makes a timely contribution to the debate of timely loss recognition by confirming the complementarity between the inclusion of restrictive covenants in the debt agreement and the accounting conservatism before and after the emission of public debt.

Details

Journal of Financial Reporting and Accounting, vol. 21 no. 2
Type: Research Article
ISSN: 1985-2517

Keywords

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

Article
Publication date: 6 February 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

Article
Publication date: 27 September 2022

Yu-Shan Chang, Li-Lin (Sunny) Liu and Dana A. Forgione

The purpose of this paper is to examine whether firms use different earnings management approaches when facing financial difficulties and the effects of industry-specialist…

Abstract

Purpose

The purpose of this paper is to examine whether firms use different earnings management approaches when facing financial difficulties and the effects of industry-specialist auditors in constraining those choices. The empirical results suggest that (1) firms with lower risk of business failure but with stronger incentives to adjust earnings upward tend to use real earnings management (REM) income-increasing approaches while (2) at the same time, using discretionary accruals for income-decreasing earnings management, due to constraints imposed by specialist auditors on the use of accrual-based earnings management (AEM). This is consistent with the findings of Chi et al., and the authors do not find similar evidence for the firms with higher risk of failure. Also, (3) regardless of the level of failure risk, firms turn to REM while interestingly, such REM behavior is effectively curbed by industry-leading specialist auditors (specialist auditors with the highest client market share) on financially distressed firms. These results extend the findings of Chi et al. (2011), suggesting that industry-specialist auditors have different tolerance levels for earnings management approaches by firms with different levels of business failure risk. That is, when auditing clients with higher risk of failure, specialist auditors are more likely to maintain higher audit quality through more stringent audit testing and use of more audit staff time to prevent an occurrence of audit failure.

Design/methodology/approach

The authors examine earnings management behavior across firms in Taiwan with different levels of business failure risk and the effects of audit partner industry specialization in constraining that behavior. Chi et al. (2011) studied low-risk firms with incentives to adjust earnings upward and found firms use REM when the auditors constrain AEM. The authors extend the work of Chi et al. and observe firms with different levels of failure risk.

Findings

The authors find (1) lower risk firms may use discretionary accruals to adjust earnings downward while the authors find no similar evidence for financially distressed firms, (2) lower risk firms may use REM when their industry-specialist auditors curb AEM and (3) the industry leaders among specialist auditors do the same for the financially distressed firms. The results demonstrate the extent to which industry-specialist auditors apply different tolerance levels for earnings management behaviors across firms with different levels of failure risk.

Originality/value

The study contributes to the literature in the following three ways: first, the authors fill a gap in the existing literature by comparing firms with higher risk of business failure to firms with lower risk of business failure to explore the possible difference in the two different kinds of earnings management behavior; second, the authors extend the findings of Chi et al. (2011) and examine whether specialist auditors, when auditing firms with higher risk of business failure, will input more audit effort to constrain their clients' use of REM and third, since business failures have a significant impact on the capital markets and any associated audit failures can have an even greater negative impact on investor confidence, the study provides information useful to auditors and regulators in the formation of salient policy regarding the use of REM by firms experiencing high risk of business failure.

Details

Asian Review of Accounting, vol. 30 no. 4
Type: Research Article
ISSN: 1321-7348

Keywords

Article
Publication date: 16 March 2015

Mahdi Moradi, Mahdi Salehi and Mohammad Zamanirad

– The purpose of this paper is to analyze the effect of managers’ incentive bonuses on both accrual and real earnings management.

2022

Abstract

Purpose

The purpose of this paper is to analyze the effect of managers’ incentive bonuses on both accrual and real earnings management.

Design/methodology/approach

First, the authors investigate the relationship between managers’ bonuses and both accrual earnings management (measured by a modified Jones model) and real earnings management (measured by Roychowdhury proxies). Next, the authors examine whether management has any preferences for earnings management methods to enhance its bonuses. Finally, the authors investigate the possible effects of earnings management on future operating performance. The sample consists of compositional data in the period from 2006 to 2012.

Findings

The authors find a negative relationship between real earnings management and managers’ bonuses and detect that managers prefer to use accrual earnings management to earn more bonuses. The results also show that real earnings management will reduce a firm’s performance in future periods, and on the other hand that increasing managers’ bonuses links to improvement of the firm’s future performance. The results suggest that managers are typically aware of the negative effects of real earnings management on the firm’s future performance and thus prefer to improve the firm’s performance in securing their bonuses when their ability to manage accruals is constrained.

Originality/value

The implications of this paper provide further evidence on how managers’ bonuses affect their discretion in using accrual and real earnings management. This finding is important to investors and regulators.

Details

Management Decision, vol. 53 no. 2
Type: Research Article
ISSN: 0025-1747

Keywords

1 – 10 of 121