Applying Benford’s law to detect accounting data manipulation in the banking industry

We utilise Benford’s Law to test if balance sheet and income statement data broadly used to assess bank soundness were manipulated prior to and also during the global financial crisis. We find that all banks resort to loan loss provisions to manipulate earnings and income upwards. Distressed institutions that have stronger incentives to conceal their financial difficulties resort additionally to manipulating loan loss allowances and non-performing loans downwards. Moreover, manipulation is magnified during the crisis and expands to encompass regulatory capital

Association between hyperketolactia and production in early-lactating dairy cows

Study aims were to investigate associations of hyperketolactia (HYKL) status of Holstein dairy cows between 6 and 60 d in milk (DIM), defined by milk acetone (mACE) and β-hydroxybutyrate (mBHB) content, with daily milk yield and composition. Milk samples (∼5.0 million) were collected over a 5-yr period (2014–2019) within the milk recording system in Poland. Concentrations of mACE and mBHB determined by Fourier-transform infrared spectroscopy were used to categorize samples into 4 ketolactia groups. Based on threshold values of ≥0.15 mmol/L mACE and ≥0.10 mmol/L mBHB, ketolactia groups were normoketolactia (NKL; mACE <0.15 mmol/L and mBHB <0.10 mmol/L), BHB hyperketolactia (HYKLBHB; mACE <0.15 mmol/L and mBHB ≥0.10 mmol/L), ACE hyperketolactia (HYKLACE; mACE ≥0.15 mmol/L and mBHB <0.10 mmol/L), and ACE and BHB hyperketolactia (HYKLACEBHB; mACE ≥0.15 mmol/L and mBHB ≥0.10 mmol/L). To investigate ketolactia association with production outcomes, a linear model was developed, including ketolactia group, DIM, parity, their interactions, year-season as fixed effects, and random effects of herd and cow. Among all milk samples, 31.2% were classified as HYKL, and of these, 52.6%, 39.6%, and 7.8% were HYKLACEBHB, HYKLBHB, and HYKLACE, respectively. Ketolactia groups differed for all traits studied in all parities and DIM. Among HYKL groups, lowest milk yield was found in HYKLACEBHB cows, except for 6 to 30 DIM in first- and second-lactation cows. Milk yield of HYKLBHB cows was higher than that of NKL cows until 20 to 30 DIM, and then it was lower than NKL cows. Milk yield of HYKLACE cows was mostly lower than NKL cows. Energy-corrected milk (ECM) yield of HYKLACEBHB cows was higher than that of NKL cows until 30 to 35 DIM for second lactation and third lactation or greater, and in the whole study period for first lactation. The yield of ECM for HYKLBHB cows was mostly higher than that of NKL cows, whereas HYKLACE cows had higher ECM than NKL cows until 15 to 25 DIM and then was lower for the HYKLACE group. Milk composition differed among HYKL groups. Highest milk fat (MF) and lowest milk lactose (ML) contents were observed in HYKLACEBHB cows. Cows in HYKLACEBHB and HYKLBHB groups had higher MF and lower milk protein (MP; except in 6–8 DIM in first lactation) and ML content than NKL cows. Milk fat content was higher in HYKLACE than NKL cows in first lactation and during the first 30 to 40 DIM in older cows. Lactose content was lower in HYKLACE than in NKL cows within 30 to 40 DIM; afterward it was higher in NKL cows. Lower MP content was found in HYKLACE than in NKL cows, except during 6 to 9 DIM for cows in first lactation and third lactation or greater. In conclusion, HYKL is associated with altered milk production in all parities, but a range of these negative relations depends on ketone status addressing both ACE and BHB contents. Further research is needed to ascertain underpinning biochemical defects of HYKL from elevated ACE, alone or in combination with BHB, during early lactation

Earnings Management: The Effect of Ex Ante Earnings Expectations

Yeshttps://us.sagepub.com/en-us/nam/manuscript-submission-guideline

Does relative efficiency matter? An analysis of market uncertainty

In this paper, we examine whether relative efficiency provides useful information for investment decisions. We find that efficient firms have lower levels of stock price volatility compared to inefficient firms. The results suggest that market participants consider relative efficiency when making investment decisions. This finding is consistent with investors speculating in inefficient firms due to potential stock return opportunities that increase the uncertainty levels of inefficient firms. Next, we test whether higher levels of investment and disinvestment in inefficient firms are due to potential investment opportunities. We find a positive relation between stock price volatility and market returns. Moreover, we find a negative relation between stock returns and relative efficiency. These findings show that inefficient firms provide high-risk, high-return potential investment opportunities; and efficient firms can be considered low-risk, low-return investment opportunities

Earnings Prediction with Deep Leaning

In the financial sector, a reliable forecast the future financial performance of a company is of great importance for investors' investment decisions. In this paper we compare long-term short-term memory (LSTM) networks to temporal convolution network (TCNs) in the prediction of future earnings per share (EPS). The experimental analysis is based on quarterly financial reporting data and daily stock market returns. For a broad sample of US firms, we find that both LSTMs outperform the naive persistent model with up to 30.0% more accurate predictions, while TCNs achieve and an improvement of 30.8%. Both types of networks are at least as accurate as analysts and exceed them by up to 12.2% (LSTM) and 13.2% (TCN).Comment: 7 pages, 4 figures, 2 tables, submitted to KI202

Where do firms manage earnings?

Despite decades of research on how, why, and when companies manage earnings, there is a paucity of evidence about the geographic location of earnings management within multinational firms. In this study, we examine where companies manage earnings using a sample of 2,067 U.S. multinational firms from 1994 to 2009. We predict and find that firms with extensive foreign operations in weak rule of law countries have more foreign earnings management than companies with subsidiaries in locations where the rule of law is strong. We also find some evidence that profitable firms with extensive tax haven subsidiaries manage earnings more than other firms and that the earnings management is concentrated in foreign income. Apart from these results, we find that most earnings management takes place in domestic income, not foreign income.Arthur Andersen (Firm) (Arthur Andersen Faculty Fund

CEO Profile and Earnings Quality

This paper introduces the PSCORE, which aggregates nine personal characteristics of chief executive officers (CEOs), to signal the quality of earnings. The PSCORE is a composite score based on publicly available data on CEOs. The study reports strong positive relationships between the PSCORE and two different proxies for earnings quality, (i) discretionary accruals and (ii) financial statement errors, measured by deviations of the first digits of figures reported in financial statements from those expected by Benford’s Law. Further analyses indicate that the relationships between the PSCORE and the proxies for earnings quality become more pronounced when CEOs have high equity-based compensation incentives. The findings have some implications for practitioners

Banks' risk assessment of Swedish SMEs

Building on the literatures on asymmetric information and risk taking, this paper applies conjoint experiments to investigate lending officers' probabilities of supporting credit to established or existing SMEs. Using a sample of 114 Swedish lending officers, we test hypotheses concerning how information on the borrower's ability to repay the loan; alignment of risk preferences; and risk sharing affect their willingness to grant credit. Results suggest that features that reduce the risk to the bank and shift the risk to the borrower have the largest impact. The paper highlights the interaction between factors that influence the credit decision. Implications for SMEs, banks and research are discussed