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

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 Management: The Effect of Ex Ante Earnings Expectations

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

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

Review: Perspective on high-performing dairy cows and herds

Milk and dairy products provide highly sustainable concentrations of essential amino acids and other required nutrients for humans; however, amount of milk currently produced per dairy cow globally is inadequate to meet future needs. Higher performing dairy cows and herds produce more milk with less environmental impact per kg than lower performing cows and herds. In 2018, 15.4% of the world\u27s dairy cows produced 45.4% of the world\u27s dairy cow milk, reflecting the global contribution of high-performing cows and herds. In high-performing herds, genomic evaluations are utilized for multiple trait selection, welfare is monitored by remote sensing, rations are formulated at micronutrient levels, health care is focused on prevention and reproduction is managed with precision. Higher performing herds require more inputs and generate more waste products per cow, thus innovations in environmental management on such farms are essential for lowering environmental impacts. Our focus is to provide perspectives on technologies and practices that contribute most to sustainable production of milk from high-performing dairy cows and herds

Does Regulatory Environment affect Earnings Management in Transitional Economies? An Empirical Examination of the Financial Reporting Quality of Cross-Listed Firms of China and Hong Kong

This chapter provides evidence on the impact of regulatory environment on financial reporting quality of transitional economies. This study compares the financial reporting quality of Hong Kong firms which are cross-listed in mainland China with those of Hong Kong firms cross-listed in China using specific earnings management metrics (earnings smoothing, timely loss recognition, value relevance and managing towards earnings targets) under pre- and post-IFRS regimes. The financial reporting quality of Chinese A-share companies and Hong Kong listed companies are examined using earnings management measures. Using 2007 as base year, the study used a cumulative of −5 and +5 years of convergence experience which provide a total of 3,000 firm-year observations. In addition to regression analyses, we used the difference-in-difference analysis to check for the impact of regulatory environments on earnings management. Through the lens of contingency theory, our results indicate that the adoption of the new substantially IFRS-convergent accounting standards in China results in better financial reporting quality evidenced by less earning management. The empirical results further shows that accounting data are more value relevant for Hong Kong listed firms, and that firms listed in China are more likely to engage in accrual-based earnings management than in real earnings management activities. We established that different earnings management practices that are seemingly tolerable in one country may not be tolerable in another due to level of differences in the regulatory environments. The findings show that Hong Kong listed companies’ exhibit higher level of financial reporting quality than Chinese listed companies, which implies that the financial reporting quality under IFRS can be significantly different in regions with different institutional, economic and regulatory environments. The results imply that contingent factors such as country’s institutional structures, its extent of regulation and the strength of its investor protection environments impact on financial reporting quality particularly in transitional and emerging economies. As such, these factors need to be given appropriate considerations by financial reporting regulators and policy-makers interested in controlling earnings management practices among their corporations. This study is a high impact study considering that China plays a significant role in today’s globalised economy. This study is unique as it the first, that we are aware of, to compare real earnings activities against accrual-based earnings management in pre- and post-IFRS adoption periods within the Chinese and Hong Kong financial reporting environments, distinguishing between cross-listed and non-cross-listed firms.N/

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

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

Auditor Change Disclosures as Signals of Earnings Management and Risk

Auditor resignations are considered more negative signals than auditor dismissals, but firms’ self-reported distinction between the two may not offer a complete or reliable representation of the nature of the auditor change. 8-K regulations require the disclosure of the adjournment of an audit engagement even if a successor auditor has not yet been named. In compliance with this requirement, some firms file two 8-k’s related to the same auditor change. Exploiting these dual 8-K filings, we create a new measure of the nature of auditor changes and show that 1) both self-reported auditor resignations and dual 8-K filings are related to measures of earnings management and risk; and 2) auditor changes identified as both self-reported resignations and dual 8-K filings are associated with the most negative economic implications (as reflected by the likelihood of financial statement manipulation and bankruptcy risk). We suggest that dual 8-K filings and self-reported resignations are complementary negative signals each capturing unique dimensions of the underlying economic factors