Earnings management and institutional differences Literature review and discussion.

This paper provides a review of the empirical earnings management literature. In particular, it presents a review of the factors that induce and constrain earnings management through accounting decisions. The consequences of actual or assumed earnings management are also discussed. The far majority of the literature focuses on the Anglo-Saxon context. However, major differences exist between Anglo-Saxon and continental European countries. This may result in differences in the importance of various incentives of and constraints on earnings management. In particular, we argue that explicit contracts and a firm's relations with capital markets may be less important sources of earnings management in continental Europe. Implicit contracts and the political and regulatory process may however be of major importance. We question further whether a firm's ownership and internal governance structure and the quality of the external auditor can constrain the ability to manage earnings in continental European countries.Management; Factors; Accounting; Decisions; Country; Markets;

CORPORATE GOVERNANCE AND CREATIVE ACCOUNTING: TWO CONCEPTS STRONGLY CONNECTED? SOME INTERSTING INSIGHTS HIGHLIGHTED BY CONSTRUCTING THE INTERNAL HISTORY OF A LITERATURE

Corporate governance is concerned with the relationships between a business’smanagement and its board of directors, shareholders and lenders and its other stakeholders such asemployees, customers, suppliers, and the community in which activates. The connection betweenthis topic and creative accounting was debated in the literature since the latter occurrence isrelated to the weakness of the first. Our study offers interesting insights into this strong connectionby examining the relevant ideas developed previously in the literature with the scope ofunderstanding, reinterpreting and rediscovering from interesting points of view this association inour search for responsibility in the economic environment. By conducting this study we wanted toreinforce the role of literature analyst as an interpreter who contributes meaning to the presentstate of the art.corporate governance, creative accounting, Papineau`s hierarchy

The Performance and Long-Run Characteristics of the Chinese IPO Market

We study the short-run and long-run performance of Chinese privatization initial public offerings (PIPOs), using data for 340 and 409 new issues on the Shanghai and Shenzhen Stock Exchanges respectively, from 1 January 1996 through 31 December 1997. The average market-adjusted initial return is found to be 127.31%, and the initial returns on both stock exchanges are not significantly different from each other. The average market-adjusted buy and hold return over the three years after listing is 10.26%, which is significantly different from zero at the 1% level. We then use cross-sectional analysis to explain the long-run supernormal performance of Chinese PIPOs, and find that government ownership, the offering size and the feature of belonging to a high-tech industry are the main determinants of the long-run performance. In addition, firms that perform better in the long-run tend to make more Seasoned Equity Offerings (SEOs), and the underpricing of IPOs is negatively related to their long-run performance.IPO; underpricing; long-run performance; government ownership; offering size; high tech industry; China

Industry Valuation Driven Earnings Management

This paper investigates whether industry valuation impacts firms’ earnings management decisions. Existing accounting literature assumes that industry valuation has a constant impact on this decision. We argue that a higher industry valuation increases the perceived benefits of earnings management at a time when the negative consequences associated with accrual reversal and the probability of detection are believed to be lower. Using a sample of quarterly data of U.S. firms from 1985 to 2005, we find that the four-quarter lagged industry valuation has a positive relationship with industry aggregate (current) discretionary accruals. More specific, one standard deviation increase in the aggregate industry valuation is associated with a significant increase of 2.4 cents in quarterly earnings per share. Our results are robust after controlling for several factors, including bubble years, size, leverage and performance.Industry valuation;Earnings management;Market to book ratio

Technology, Information Production, and Market Efficiency

A well functioning securities market relies on the availability of accurate information, a broad base of investors who can process this information, legal protection of these investors’ rights, and a liquid secondary market unencumbered by excessive transaction costs or constraints. When these conditions are satisfied, securities markets are likely to be broader and more efficient, with felicitous consequences for investment and resource allocation. This paper explores the effect of technological advances on these features of the market, emphasizing the incentives facing the producers of financial information.

Market Manipulation: A Comprehensive Study of Stock Pools

Using a hand collected new data set, this paper examines in detail a classic account of stock market manipulation—the “stock pools” of the 1920s, which prompted the current anti-manipulation rules in the United States. We examine abnormal turnover and returns and the relationship between them, as well as the long-term performance of the selected stocks. We conclude that the evidence suggests informed trading rather than manipulation. Our findings have implications for regulatory policy as well as the investigation and prosecution of manipulation cases

Ethics and disclosure: a study of the financial performance of firms in the seasoned equity offerings market

In this article, we examine the association between ethics and disclosure and the impact of this association on the long-term, post-issue performance of seasoned equity offerings (SEOs). We argue that firms with extensive disclosure are less likely to face information problems, and more likely to lead to active shareholder monitoring, and therefore, engage in fewer unethical activities, such as aggressive earnings manipulation, and have better long-term, post-issue performance. Consistent with these predictions, this study presents evidence that disclosure is negatively related to unethical earnings manipulation and positively associated with long-term, post-issue performance. In particular, we find that long-term, post-issue SEO underperformance is significantly less for firms with extensive disclosure and conservative earnings management than firms with less disclosure and aggressive earnings management. We interpret this evidence to mean that over the long run, the capital market values ethical financial reporting and corporate efforts to incorporate social responsibility into their decision-making processes, for example, by enhancing information transparency through voluntary disclosure. JEL classification: G14; G24; G32; M14; M4

Essays on the performance and earnings management of cross-listing firms

I investigate the performance and earnings management of firms that cross-list in foreign markets. In the first essay, I analyze and compare the underpricing and buy-and-hold abnormal returns of depositary receipt equity offerings with preceding Initial Public Offerings (IPOs) and Seasoned Equity Offerings (SEOs) of the same firms to identify differences and motivations of equity offerings free of any matching bias. I find that domestic equity offerings entail significantly larger underpricing than subsequent foreign equity offerings. The average buy-and-hold abnormal returns of depositary receipt equity offerings are significantly lower than the underlying firm’s performance at preceding domestic equity issuances over holding periods of 1 to 5 years after the respective issuances. Furthermore, traditional matching techniques as applied in most research articles comparing the performance after IPOs and SEOs may significantly overstate the degree of aftermarket performance and significantly understate the degree of underpricing. The second essay examines the existence of real and accrual-based earnings management around cross-listings in foreign markets. The results indicate that firms actively manage their earnings around cross-listing events using both, accrual and real earnings management. Real earnings management is the more favorable earnings method in comparison to accrual-based earnings management, especially for American Depositary Receipts (ADR) cross-listed via level II and III. Finally, firms listing via a sponsoring investment bank manage their real earnings significantly more than firms listed via unsponsored ADRs

The Rise of Accelerated Seasoned Equity Underwritings

Seasoned equity offerings (SEOs) executed through accelerated underwritings have increased global market share recently, raising over $850 billion since 1998, and now account for over half (two-thirds) of the value of U.S. (European) SEOs. We examine 31,242 global SEOs, executed during 1991-2004, which raise over$2.9 trillion for firms and selling shareholders. Compared to fully marketed deals, accelerated offerings occur more rapidly, raise more money, and require fewer underwriters. Importantly, accelerated deals reduce total issuance cost by about 250 basis points. Accelerated deals sell equal fractions of primary and secondary shares, whereas in traditional SEOs primary shares dominate. Announcement period returns are comparable for traditional and accelerated offerings, while secondary and mixed offerings trigger more negative market responses than do primary offerings. We conclude that this rapid, worldwide shift towards accelerated underwriting creates a spot market for SEOs, and represents the long-predicted shift towards an auction model for seasoned equity sales.Equity Offerings, Underwriting, Investment Banking

Stock markets in developing countries : key issues and a research agenda

There is much debate in both developed and developing countries about what kinds of financial institutions and markets best serve economic growth. To what extent can the superior performance of Japanese and German economies be attributed to their market-based system (with a focus on short-term gains)? Prominent in current debates about the competitiveness of industrial nations are issues of corporate financial structure and financial market organization. Drawing on recent experiences in India and Korea, the authors consider key issues that arise in connection with the development of equity markets in developing countries. Under what conditions does it make sense to encourage the development of equity markets? Is a functioning equity market a prerequisite for the liberalization of the banking system? Is it useful to think in terms of an optimal debt/equity mix for a developing economy, or for a corporation in a developing economy? What is the appropriate regulatory regime for a developing country's securities market? Without effective regulation, international investors will not have the confidence to commit the resources to developing country markets. Good managment skills are scarce in developing countries. How can matters be arranged to make optimal use of those resources? The stock market's role in effecting changes in corporate governance could be enormously helpful to economic development.Economic Theory&Research,Financial Intermediation,Banks&Banking Reform,Environmental Economics&Policies,International Terrorism&Counterterrorism