The effect of financial leverage on real and accrual-based earnings management

Past research has documented a substitution effect between real earnings management (RM) and accrual-based earnings management (AM), depending on relative costs. This study contributes to this research by examining whether levels of (and changes in) financial leverage have an impact on this empirically documented trade-off. We hypothesise that in the presence of high leverage, firms that engage in earnings manipulation tactics will exhibit a preference for RM due to a lower possibility—and subsequent costs—of getting caught. We show that leverage levels and increases positively and significantly affect upward RM, with no significant effect on income-increasing AM, while our findings point towards a complementarity effect between unexpected levels of RM and AM for firms with very high leverage levels and changes. This is interpreted as an indication that high leverage could attract heavy outsider scrutiny, making it necessary for firms to use both forms of earnings management in order to achieve earnings targets. Furthermore, we document that equity investors exhibit a significantly stronger penalising reaction to AM vs. RM, indicating that leverage-induced RM is not as easily detectable by market participants as debt-induced AM, despite the fact that the former could imply deviation from optimal business practices

The option market reaction to bank loan announcements

In this study, we examine the options market reaction to bank loan announcements for the population of US firms with traded options and loan announcements during 1996-2010. We get evidence on a significant options market reaction to bank loan announcements in terms of levels and changes in short-term implied volatility and its term structure, and observe significant decreases in short-term implied volatility, and significant increases in the slope of its term structure as a result of loan announcements. Our findings appear to be more pronounced for firms with more information asymmetry, lower credit ratings and loans with longer maturities and higher spreads. Evidence is consistent with loan announcements providing reassurance for investors in the short-term, however, over longer time horizons, the increase in the TSIV slope indicates that investors become increasingly unsure over the potential risks of loan repayment or uses of the proceeds

Near-field intensity pattern at the output of silica-based graded-index multimode fibers under selective excitation with a single-mode fiber

Abstract: Selective excitation of graded-index multimode fibers (GIMMFs) with a single-mode fiber (SMF) has gained increased interest for telecommunication applications. It has been proposed as a way to enhance the transmission bandwidth of GI-MMF links and/or create parallel communication channels over the same GI-MMF. Although the effect of SMF excitation on the transmission bandwidth has been investigated, its impact on the near-field intensity pattern at the output face of the GI-MMF has not been systematically addressed. We have carried out an analysis of the near-field intensity pattern at the output face of silica-based GI-MMFs excited by a radially offset SMF. Simulation results exhibit all of the features displayed by experimental ones. It turns out that differential mode attenuation and delay, full intra-group mode mixing, and small deviations in the refractive index profile of the GI-MMF do not affect the overall shape of the near-field intensity, which is determined by the radial offset of the input SMF. This can be exploited in mode group diversity multiplexing links. The effect of defects in the refractive index profile, such as a central dip or peak, is also examined

All-optical multilevel amplitude regeneration in a single nonlinear optical loop mirror

We experimentally demonstrate all-optical amplitude regeneration of 4-level pulse amplitude modulated signals (PAM4) based on a single nonlinear optical loop mirror (NOLM). Four power-plateau regions are achieved using return-to-zero (RZ) pulses of narrow pulse-width, enabling large nonlinear phase shifts within the highly nonlinear fiber (HNLF). We quantify noise suppression characteristics at each amplitude level and obtain an overall EVM improvement of 0.92dB by optimizing input power and distortion strength. A theoretical analysis has been also carried out matching the experimental results and revealing the design characteristics of the regenerator’s nonlinear transfer function

Accounting quality, information risk and implied volatility around earnings announcements

We examine the impact of accounting quality, used as a proxy for information risk, on the behavior of equity implied volatility around quarterly earnings announcements. Using US data during 1996–2010, we observe that lower (higher) accounting quality significantly relates to higher (lower) levels of implied volatility (IV) around announcements. Worse accounting quality is further associated with a significant increase in IV before announcements, and is found to relate to a larger resolution in IV after the announcement has taken place. We interpret our findings as indicative of information risk having a significant impact on implied volatility behavior around earnings announcements

Earnings management in firms seeking to be acquired

Empirical evidence regarding accrual-based earnings management around mergers and acquisitions has been setting-specific as far as target firms are concerned. This might be due to the fact that target firms cannot always anticipate an acquisition proposal, and thus lack the motive and the time necessary to manage their earnings in order to facilitate or impede the deal. In this paper, we provide clear evidence of downward earnings management by a sample of target firms that have both time and motive to engage in such actions. These are firms that publicly announce their intention to be acquired. Publicly ‘seeking a buyer’ represents a rather unusual corporate event, and we find that these firms engage in downward earnings management in the years surrounding the ‘announcement year’. To some extent, this result is explained by overrepresentation of low performance and growth among these firms, and it can be interpreted under alternative explanations. Furthermore, we show that such downward earnings management negatively affects the probability for a ‘seeking buyer’ firm to secure an acquisition within a reasonable amount of time, a possible indication of efficient diligence by prospective buyers having a preference for firms ‘seeking buyer’ with no informationally obscure earnings