Trends In Accrual Quality And Real Activities Based Earnings Management In The Pre And Post Sarbanes Oxley Eras

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Trends in Accrual Quality and Real Activity-based Earnings Management in the Pre and Post Sarbanes-Oxley Eras

Author : Nicholas Christopher Lynch
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (514 download)

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Book Synopsis Trends in Accrual Quality and Real Activity-based Earnings Management in the Pre and Post Sarbanes-Oxley Eras by : Nicholas Christopher Lynch

Download or read book Trends in Accrual Quality and Real Activity-based Earnings Management in the Pre and Post Sarbanes-Oxley Eras written by Nicholas Christopher Lynch and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: An increase in the prevalence of earnings restatements and cases of financial statement fraud in the early 21st century led to a significant loss of market capitalization and investor confidence in the attestation process. In an effort to restore such confidence, Congress passed the Sarbanes-Oxley Act (SOX) in July of 2002. The Act significantly increased the penalties for engaging in accrual activities aimed at either misleading users of the financial statements concerning the underlying economic condition of the firm or influencing contractual outcomes. As a result of the increased penalties for engaging in accrual activities, one would expect a relative shift from accrual activities to real activities to facilitate earnings management in the post-SOX period. As with most academic social disciplines, the test employed in my dissertation is a joint test of the sensitivity of the tools available to detect management activities, the research design, and the presence and strength of the effect for which I am searching. This dissertation is the first to test for changes in both accrual quality and real activity-based earnings management in the post-SOX period. The findings of the study empirically support a change in earnings management techniques in the post-SOX period compared to the pre-SOX period. Specifically, the quality of accruals incorporated into the accounting earnings figure have significantly increased in the post-SOX period. However, instances of earnings management using real activities have also significantly increased in the post-Sox period. These findings inform academics about the power of the tools used in academic accounting research and the overall quality of the argument. They inform users of financial statements about where to direct their attention in reading and evaluating the financials. Finally, they inform regulators, practitioners and policy makers of the effectiveness of the law at improving the quality of accruals, and bring to their attention a potential substitution in the techniques used to manage earnings.

TRENDS IN ACCRUAL QUALITY AND REAL ACTIVITIES-BASED EARNINGS MANAGEMENT IN THE PRE AND POST SARBANES-OXLEY ERAS.

Author :
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (654 download)

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Book Synopsis TRENDS IN ACCRUAL QUALITY AND REAL ACTIVITIES-BASED EARNINGS MANAGEMENT IN THE PRE AND POST SARBANES-OXLEY ERAS. by :

Download or read book TRENDS IN ACCRUAL QUALITY AND REAL ACTIVITIES-BASED EARNINGS MANAGEMENT IN THE PRE AND POST SARBANES-OXLEY ERAS. written by and published by . This book was released on 2005 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: An increase in the prevalence of earnings restatements and cases of financial statement fraud in the early 21st century led to a significant loss of market capitalization and investor confidence in the attestation process. In an effort to restore such confidence, Congress passed the Sarbanes-Oxley Act (SOX) in July of 2002. The Act significantly increased the penalties for engaging in accrual activities aimed at either misleading users of the financial statements concerning the underlying economic condition of the firm or influencing contractual outcomes. Recent literature separates earnings management into accrual and real activities. Accrual activities include the management of accounts that have not yet been realized in cash, such as receivables and payables. Real activities include the management of actions that deviate from normal business practices, such as price discounts aimed at temporarily increasing sales, excessive inventory production aimed at lowering the cost of goods sold, and aggressively reducing discretionary expenditures such as R & D to improve profit margins. As a result of the increased penalties for engaging in accrual activities, one would expect a relative shift from accrual activities to real activities to facilitate earnings management in the post-SOX period. As with most academic social disciplines, the test employed in my dissertation is a joint test of the sensitivity of the tools available to detect management activities, the research design, and the presence and strength of the effect for which I am searching. This dissertation is the first to test for changes in both accrual quality and real activity-based earnings management in the post-SOX period. In order to test for a change in accrual quality in the post-SOX period, I utilize a model developed by Dechow and Dichev in 2002. The Dechow and Dichev (2002) model of accrual quality is an appropriate measure of accrual information risk, and may therefore be superior to the use of discre.

Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes Oxley Periods

Author : Daniel A. Cohen
Publisher :
ISBN 13 :
Total Pages : 52 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes Oxley Periods by : Daniel A. Cohen

Download or read book Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes Oxley Periods written by Daniel A. Cohen and published by . This book was released on 2008 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: We document that accrual-based earnings management increased steadily from 1987 until the passage of the Sarbanes Oxley Act (SOX) in 2002, followed by a significant decline after the passage of SOX. Conversely, the level of real earnings management activities declined prior to SOX and increased significantly after the passage of SOX, suggesting that firms switched from accrual-based to real earnings management methods after the passage of SOX. We also find evidence that the accrual-based earnings management activities were particularly high in the period immediately preceding SOX. Consistent with these results, we find that firms that just achieved important earnings benchmarks used less accruals and more real earnings management after SOX when compared to similar firms before SOX. Finally, our analysis provides evidence that the increases in accrual-based earnings management in the period preceding SOX were concurrent with increases in the fraction of equity based compensation.

Introduction to Earnings Management

Author : Malek El Diri
Publisher : Springer
ISBN 13 : 3319626868
Total Pages : 120 pages
Book Rating : 4.3/5 (196 download)

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Book Synopsis Introduction to Earnings Management by : Malek El Diri

Download or read book Introduction to Earnings Management written by Malek El Diri and published by Springer. This book was released on 2017-08-20 with total page 120 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book provides researchers and scholars with a comprehensive and up-to-date analysis of earnings management theory and literature. While it raises new questions for future research, the book can be also helpful to other parties who rely on financial reporting in making decisions like regulators, policy makers, shareholders, investors, and gatekeepers e.g., auditors and analysts. The book summarizes the existing literature and provides insight into new areas of research such as the differences between earnings management, fraud, earnings quality, impression management, and expectation management; the trade-off between earnings management activities; the special measures of earnings management; and the classification of earnings management motives based on a comprehensive theoretical framework.

Earnings Management. The Influence of Real and Accrual-Based Earnings Management on Earnings Quality

Author :
Publisher : GRIN Verlag
ISBN 13 : 3964875953
Total Pages : 81 pages
Book Rating : 4.9/5 (648 download)

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Book Synopsis Earnings Management. The Influence of Real and Accrual-Based Earnings Management on Earnings Quality by :

Download or read book Earnings Management. The Influence of Real and Accrual-Based Earnings Management on Earnings Quality written by and published by GRIN Verlag. This book was released on 2024-01-31 with total page 81 pages. Available in PDF, EPUB and Kindle. Book excerpt: Master's Thesis from the year 2019 in the subject Business economics - Accounting and Taxes, University of Duisburg-Essen, course: Master Thesis, language: English, abstract: This paper delves into various theories and approaches, aiming to define and differentiate earnings management from related concepts such as fraud, expectation management, and impression management. It explores the goals and incentives driving earnings management, including maximizing or minimizing earnings, beating targets, and smoothing. At the onset of the new millennium, corporate scandals rocked the business world, eroding trust in management, boards of directors, and the accounting profession. In response, regulations and policies aimed at enhancing corporate governance and financial reporting were swiftly implemented. The credibility, clarity, and consistency of financial reporting practices play a pivotal role in enabling investors to make informed decisions. Accurate and fair financial performance representations, as opposed to inflated and misleading figures, are essential for market players, including shareholders and creditors. Investors rely on audited financial reports to guide their investment decisions, underscoring the critical importance of accuracy and reliability in publicly available financial disclosures. Auditors, by reducing the risk of material misstatement, ensure the integrity of the information disclosed in a company's financial statements. Management, with the goal of achieving promised targets and ensuring the company's existence, may engage in earnings management as a strategic contribution to corporate policy. Financial reporting serves as a means to distinguish well-performing companies from their counterparts, facilitating efficient resource allocation and empowering stakeholders to make effective decisions. The disclosed earnings results significantly impact a firm's overall business activities and management decisions, particularly in satisfying analysts' expectations, which can influence equity value. While accounting standards play a role, the quality of financial statements is more influenced by company-specific and institutional factors shaping managers' incentives. These factors lead to financial reporting practices being viewed as the outcome of a cost-benefit assessment.

Mechanisms to Meet/Beat Analyst Earnings Expectations in the Pre- and Post-Sarbanes-Oxley Eras

Author : Eli Bartov
Publisher :
ISBN 13 :
Total Pages : 44 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Mechanisms to Meet/Beat Analyst Earnings Expectations in the Pre- and Post-Sarbanes-Oxley Eras by : Eli Bartov

Download or read book Mechanisms to Meet/Beat Analyst Earnings Expectations in the Pre- and Post-Sarbanes-Oxley Eras written by Eli Bartov and published by . This book was released on 2008 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper asks two questions. First, has the prevalence of expectations management tomeet/beat analyst expectations changed in the aftermath of the 2001-2002 accountingscandals and the passage of the 2002 Sarbanes-Oxley Act (SOX)? Second, has the mixamong the three mechanisms used for meeting earnings targets: accrual earningsmanagement, real earnings management, and earnings expectations management shiftedin the Post-SOX Period? We document that the propensity to meet/beat analystexpectations has declined significantly in the Post-SOX Period. Our primary findingsexplain this pattern. In particular, we find a decline in the use of expectationsmanagement and accrual management, and no change in real earnings management in thePost-SOX Period relative to the preceding seven-year period. Our results are robust tocontrolling for varying macro economic conditions. These findings contribute to theacademic literature, investors, and regulators.

Trends in Earnings Management and Informativeness of Earnings Announcements in the Pre- and Post-Sarbanes Oxley Periods

Author : Daniel A. Cohen
Publisher :
ISBN 13 :
Total Pages : 44 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Trends in Earnings Management and Informativeness of Earnings Announcements in the Pre- and Post-Sarbanes Oxley Periods by : Daniel A. Cohen

Download or read book Trends in Earnings Management and Informativeness of Earnings Announcements in the Pre- and Post-Sarbanes Oxley Periods written by Daniel A. Cohen and published by . This book was released on 2008 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: We document that firms' management of accounting earnings increased steadily from 1987 until the passage of the Sarbanes Oxley Act (SOX), with a significant increase during the period prior to SOX, followed by a significant decline after passage of SOX. However, the increase in earnings management preceding SOX was primarily in poorly performing industries. We also show that the informativeness of earnings increased steadily over time, and there was no significant change in earnings informativeness following the passage of SOX. Further, we find that earnings management increased the absolute informativeness of earnings, but reduced the informativeness for a given earnings surprise, as well as reduced the abnormal return for a given amount of earnings surprise. Finally, the evidence supports the hypothesis that the opportunistic behavior of managers, primarily related to the fraction of compensation derived from options, was significantly associated with earnings management in the period preceding SOX.

Earnings Quality

Author : Jennifer Francis
Publisher : Now Publishers Inc
ISBN 13 : 1601981147
Total Pages : 97 pages
Book Rating : 4.6/5 (19 download)

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Book Synopsis Earnings Quality by : Jennifer Francis

Download or read book Earnings Quality written by Jennifer Francis and published by Now Publishers Inc. This book was released on 2008 with total page 97 pages. Available in PDF, EPUB and Kindle. Book excerpt: This review lays out a research perspective on earnings quality. We provide an overview of alternative definitions and measures of earnings quality and a discussion of research design choices encountered in earnings quality research. Throughout, we focus on a capital markets setting, as opposed, for example, to a contracting or stewardship setting. Our reason for this choice stems from the view that the capital market uses of accounting information are fundamental, in the sense of providing a basis for other uses, such as stewardship. Because resource allocations are ex ante decisions while contracting/stewardship assessments are ex post evaluations of outcomes, evidence on whether, how and to what degree earnings quality influences capital market resource allocation decisions is fundamental to understanding why and how accounting matters to investors and others, including those charged with stewardship responsibilities. Demonstrating a link between earnings quality and, for example, the costs of equity and debt capital implies a basic economic role in capital allocation decisions for accounting information; this role has only recently been documented in the accounting literature. We focus on how the precision of financial information in capturing one or more underlying valuation-relevant constructs affects the assessment and use of that information by capital market participants. We emphasize that the choice of constructs to be measured is typically contextual. Our main focus is on the precision of earnings, which we view as a summary indicator of the overall quality of financial reporting. Our intent in discussing research that evaluates the capital market effects of earnings quality is both to stimulate further research in this area and to encourage research on related topics, including, for example, the role of earnings quality in contracting and stewardship.

Earnings Management

Author : Joshua Ronen
Publisher : Springer Science & Business Media
ISBN 13 : 0387257713
Total Pages : 587 pages
Book Rating : 4.3/5 (872 download)

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Book Synopsis Earnings Management by : Joshua Ronen

Download or read book Earnings Management written by Joshua Ronen and published by Springer Science & Business Media. This book was released on 2008-08-06 with total page 587 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book is a study of earnings management, aimed at scholars and professionals in accounting, finance, economics, and law. The authors address research questions including: Why are earnings so important that firms feel compelled to manipulate them? What set of circumstances will induce earnings management? How will the interaction among management, boards of directors, investors, employees, suppliers, customers and regulators affect earnings management? How to design empirical research addressing earnings management? What are the limitations and strengths of current empirical models?

Earnings quality and earnings management

Author : Sanjay Wikash Bissessur
Publisher : Rozenberg Publishers
ISBN 13 : 9051709870
Total Pages : 217 pages
Book Rating : 4.0/5 (517 download)

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Book Synopsis Earnings quality and earnings management by : Sanjay Wikash Bissessur

Download or read book Earnings quality and earnings management written by Sanjay Wikash Bissessur and published by Rozenberg Publishers. This book was released on 2005 with total page 217 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Dissertation Abstracts International

Author :
Publisher :
ISBN 13 :
Total Pages : 568 pages
Book Rating : 4.F/5 ( download)

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Book Synopsis Dissertation Abstracts International by :

Download or read book Dissertation Abstracts International written by and published by . This book was released on 2008 with total page 568 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Camouflaged Indicators of Earnings Management

Author : Itay Kama
Publisher :
ISBN 13 :
Total Pages : 42 pages
Book Rating : 4.:/5 (13 download)

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Book Synopsis Camouflaged Indicators of Earnings Management by : Itay Kama

Download or read book Camouflaged Indicators of Earnings Management written by Itay Kama and published by . This book was released on 2019 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: We argue that, in response to increased scrutiny and greater attention to accruals versus sales, firms become more likely to engage in accrual conversion (AC) cash management aimed at aligning cash and accruals with earnings and sales (e.g., by factoring of receivables). In doing so, they reduce the statistical power of standard indicators of accrual-based earnings management--in effect, camouflaging their earnings management activity. This proposition is of interest because many influential papers on earnings management have utilized accrual-based indicators to reach their conclusions. Our results indicate that firms indeed became more likely to engage in AC cash management after the passage of the Sarbanes-Oxley Act (SOX), and that this tendency was particularly pronounced among firms with strong incentives (or enhanced ability) to perform and hide earnings management. In particular, our findings suggest that the post-SOX decrease in standard measurements of accrual-based earnings management, identified in prior research, is partially attributable to firms' increased engagement in AC cash management activity.

The Mispricing of Real Earnings Management in the Post-Sarbanes-Oxley Era

Author : Lei Cai
Publisher :
ISBN 13 :
Total Pages : 232 pages
Book Rating : 4.:/5 (864 download)

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Book Synopsis The Mispricing of Real Earnings Management in the Post-Sarbanes-Oxley Era by : Lei Cai

Download or read book The Mispricing of Real Earnings Management in the Post-Sarbanes-Oxley Era written by Lei Cai and published by . This book was released on 2013 with total page 232 pages. Available in PDF, EPUB and Kindle. Book excerpt:

The Internal Control Provisions of Sarbanes-Oxley Act and Quality of Interim Earnings

Author : Lei Han
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (759 download)

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Book Synopsis The Internal Control Provisions of Sarbanes-Oxley Act and Quality of Interim Earnings by : Lei Han

Download or read book The Internal Control Provisions of Sarbanes-Oxley Act and Quality of Interim Earnings written by Lei Han and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This study examines the change in the quality of interim earnings around the enactment of Sarbanes-Oxley Act (SOX) and whether the change differs between interim and annual earnings by focusing on the impact of internal control provisions. In particular, two hypotheses are tested in this study. First, the quality of interim earnings improves after the SOX. Second, the gap in earnings quality between annual and interim reporting decreases after the SOX. Prior research indicates that the quality of interim earnings is lower because managers have more discretion in interim reporting and interim earnings are only subject to review which involves limited auditors' work. This study is motivated by the argument that the internal control provisions of SOX (SOX 302 and SOX 404) are expected to dampen the major causes that have led to the lower quality of interim earnings. Specifically, (1) SOX 302 mandates the management's certification of internal controls on a quarterly basis, and (2) SOX 404 increases the extent and amount of audit work during interim quarters. In the empirical analysis, earnings quality is measured under two approaches: the earnings-management approach and the earnings-attribute approach. Under the earnings-management approach, discretionary accruals are used to measure earnings quality. Under the earnings-attribute approach, both accrual quality and the valuerelevance of earnings are used to measure earnings quality. The results of earnings management provide strong support to both hypotheses. Specifically, earnings management with interim quarters decreases after the passage of SOX, suggesting the improvement of interim earnings quality. Moreover, such improvement for interim earnings is higher than that for annual earnings. Both SOX 302 and SOX 404 appear to play a role in decreasing earnings management with interim quarters and in reducing the gap in earnings quality between interim quarters and annual periods. The results of earnings attributes provide little support to both hypotheses. The tests based on accrual quality fail to support either hypothesis. The tests based on value relevance provide some evidence that the value relevance of interim earnings improves after SOX. However, the improvement with interim earnings is not different from that with annual earnings. In addition, only SOX 302 appears to play a role in improving the value relevance of interim earnings and in reducing the gap in value relevance between interim quarters and annual periods.

Earnings Accruals and Real Activities Management around Initial Public Offerings

Author : Peter Ising
Publisher : Springer Science & Business Media
ISBN 13 : 3658037946
Total Pages : 242 pages
Book Rating : 4.6/5 (58 download)

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Book Synopsis Earnings Accruals and Real Activities Management around Initial Public Offerings by : Peter Ising

Download or read book Earnings Accruals and Real Activities Management around Initial Public Offerings written by Peter Ising and published by Springer Science & Business Media. This book was released on 2013-10-06 with total page 242 pages. Available in PDF, EPUB and Kindle. Book excerpt: The beginning of the new millennium was characterized by company scandals in accounting around the world. A transparent and fair presentation of financial statements is beneficial for capital market participants. Especially around initial public offerings different incentives of these players exist to influence financial statements in diverse aspects. Therefore, studies of earnings management try to identify abnormal behavior. Peter Ising covers additional aspects to shed light on substantial drivers of discretionary reporting behavior around going public. Factors like influence on real activities, industry affiliation, and specific years in the IPO process add further insight to this theoretical and practical topic. The dependence on these factors is high and confirms that company specifics are important for interpretation of financial results.

Quarterly Earnings Management

Author : Demetris Christodoulou
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (13 download)

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Book Synopsis Quarterly Earnings Management by : Demetris Christodoulou

Download or read book Quarterly Earnings Management written by Demetris Christodoulou and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the systematic difference between interim and fourth quarters in managerial decisions to engage in accruals and real activities management to meet analysts' quarterly earnings forecasts. Findings reveal that managers engage in income-increasing accounting accruals manipulations during the interim quarters. Managers engage in real activities management during the final quarter, through reductions in R&D and SG&A expenditures, aggressive sales discounts and overproduction of inventory. The managerial intervention with normal levels of R&D has become increasingly common following the implementation of the Sarbanes-Oxley Act (SOX) in 2003, and occurs throughout all four quarters. In the post-SOX period, firms also engage in aggressive sales discounts and overproduction before the year-end in order to boost earnings. There is an evident managerial preference in the timing between accruals and real activities management with the former being prevalent during the interim quarters when the discretion to delay expense recognition is allowed as part of integral accounting and the auditors scrutiny is absent, and the later only taking place mostly in the final quarter given the cost of adjusting operations towards meeting short term myopic targets. The business practice of reducing R&D and SG&A spending to gain short-term financial benefits is an unintended outcome that is partially attributed to the US accounting requirements of the direct expensing of firms' internal intangible investments. The myopic investment behaviour poses a barrier to the generation and development of firms' intellectual capital and may have detrimental effects on the long-term economic advances.

Accounting-based Earnings Management and Real Activities Manipulation

Author : Wei Yu
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (429 download)

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Book Synopsis Accounting-based Earnings Management and Real Activities Manipulation by : Wei Yu

Download or read book Accounting-based Earnings Management and Real Activities Manipulation written by Wei Yu and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In the first essay, I examine the association between auditor industry specialization and earnings management choices. Prior research suggests that industry specialist auditors constrain accounting-based earnings management. But such actions may cause client companies to seek alternative means to manage earnings. Specifically, companies that hire industry specialist auditors may alter operating decisions to meet earnings targets, referred to as real activities manipulation. This essay investigates whether clients of industry specialist auditors that have an incentive to manage earnings are constrained from managing earnings through accruals manipulation and, therefore, are more likely to engage in real activities manipulation. Further, I examine whether operating performance declines for firms suspected of real activities manipulation. My findings indicate that clients of industry specialist auditors with incentives to manage earnings have lower absolute value of accruals relative to firms with incentives to manage earnings that do not hire industry specialist auditors. These clients of industry specialist auditors are also more likely to engage in real activities manipulation, suggesting this is a possible unintended consequence of hiring an industry specialist auditor. I also document evidence that firms suspected of real activities manipulation have lower future operating performance relative to firms not suspected of real activities manipulation.