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Reported Earnings (reported + earning)
Selected AbstractsEarnings Quality and the Equity Risk Premium: A Benchmark Model,CONTEMPORARY ACCOUNTING RESEARCH, Issue 3 2006Kenton K. Yee Abstract This paper solves a model that links earnings quality to the equity risk premium in an infinite-horizon consumption capital asset pricing model (CAPM) economy. In the model, risk-averse traders hold diversified portfolios consisting of risk-free bonds and shares of many risky firms. When constructing their portfolios, traders rely on noisy reported earnings and dividend payments for information about the risky firms. The main new element of the model is an explicit representation of earnings quality that includes hidden accrual errors that reverse in subsequent periods. The model demonstrates that earnings quality magnifies fundamental risk. Absent fundamental risk, poor earnings quality cannot affect the equity risk premium. Moreover, only the systematic (undiversified) component of earnings-quality risk contributes to the equity risk premium. In contrast, all components of earnings-quality risk affect earnings capitalization factors. The model ties together consumption CAPM and accounting-based valuation research into one price formula linking earnings quality to the equity risk premium and earnings capitalization factors. [source] Earnings Management to Avoid Losses and Earnings Decreases: Are Analysts Fooled?,CONTEMPORARY ACCOUNTING RESEARCH, Issue 2 2003David C. Burgstahler Abstract This paper explores whether analyst forecasts impound the earnings management to avoid losses and small earnings decreases documented in Burgstahler and Dichev 1997, whether analysts are able to identify which specific firms engage in such earnings management, and the implications for significant forecast error anomalies at zero earnings and zero forecast earnings. We use data from Zacks Investment Research 1999 and find that analysts anticipate earnings management to avoid small losses and small earnings decreases. Further, analysts are much more likely to forecast zero earnings than firms are to realize zero earnings, and analysts are unable to consistently identify the specific firms that engage in earnings management to avoid small losses. This latter inability contributes to significant forecast pessimism associated with zero reported earnings and significant forecast optimism associated with zero earnings forecasts. [source] Do Australian companies manage earnings to meet simple earnings benchmarks?ACCOUNTING & FINANCE, Issue 1 2003David Holland Measurement error in unexpected accruals is an important problem for empirical earnings management research. Several recent studies avoid this problem by examining the pooled, cross,sectional distribution of reported earnings. Discontinuities in the distribution of reported earnings around key earnings thresholds may indicate the exercise of management discretion (i.e. earnings management). We apply this approach to the detection of earnings management by Australian firms. Our results generally indicate significantly more small earnings increases and small profits than expected and conversely, considerably fewer small earnings decreases and small losses than expected. These results are much stronger for larger Australian firms. We undertake an exploratory analysis of alternative explanations for our results and find some evidence consistent with management signalling its inside knowledge about the firm's expected future profitability to smooth earnings, as opposed to ,management intent to deceive' as an explanation for our results. [source] How Much New Information Is There in Earnings?JOURNAL OF ACCOUNTING RESEARCH, Issue 5 2008RAY BALL ABSTRACT We quantify the relative importance of earnings announcements in providing new information to the share market, using the R2 in a regression of securities' calendar-year returns on their four quarterly earnings-announcement "window" returns. The R2, which averages approximately 5% to 9%, measures the proportion of total information incorporated in share prices annually that is associated with earnings announcements. We conclude that the average quarterly announcement is associated with approximately 1% to 2% of total annual information, thus providing a modest but not overwhelming amount of incremental information to the market. The results are consistent with the view that the primary economic role of reported earnings is not to provide timely new information to the share market. By inference, that role lies elsewhere, for example, in settling debt and compensation contracts and in disciplining prior information, including more timely managerial disclosures of information originating in the firm's accounting system. The relative informativeness of earnings announcements is a concave function of size. Increased information during earnings-announcement windows in recent years is due only in part to increased concurrent releases of management forecasts. There is no evidence of abnormal information arrival in the weeks surrounding earnings announcements. Substantial information is released in management forecasts and in analyst forecast revisions prior (but not subsequent) to earnings announcements. [source] Managing Earnings with Intercorporate InvestmentsJOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 5-6 2006Øyvind Bøhren Abstract:, We explore to what extent firms deliberately manage their financial reports by exploiting the flexibility of generally accepted accounting principles. Using a sample of Oslo Stock Exchange-listed firms with 20,50% equity holdings in other firms, we find that firms with high financial leverage tend to maximize reported earnings from these investments through their choice between the cost method and the equity method, possibly in an attempt to reduce debt renegotiation costs or to avoid regulatory attention. In contrast, managers do not systematically bias reported earnings to extract private benefits or to signal revised expectations about future cash flows. Firms use different earnings management tools in a consistent way, as the earnings effect of the cost/equity choice is not offset by discretionary accruals. [source] The Provision of Tax Services by Incumbent Auditors and Earnings Management: Evidence from KoreaJOURNAL OF INTERNATIONAL FINANCIAL MANAGEMENT & ACCOUNTING, Issue 1 2009Won-Wook Choi This study examines the associations between the provision of tax services by incumbent auditors and earnings management. We investigate whether three different effects of tax service provision play different roles in accounting practices. The three effects include the audit independence effect, the knowledge spillover effect, and the tax avoidance effect. If the provision of tax services by incumbent auditors harms auditor independence, firms may exercise greater earnings management (audit independence effect). However, if incumbent auditors gain incremental knowledge by offering tax services, the quality of their audit services could be enhanced, and therefore, reported earnings could be more conservative (knowledge spillover effect). If tax service fee leads to low taxable income, it could depress book income when book-tax conformity is high (tax avoidance effect). We find that the provision of tax services generally improves earnings quality by curtailing opportunistic accounting practices. The results also suggest that the negative association between the provision of tax services and discretionary accruals seems to be primarily driven by the knowledge spillover effect as opposed to the tax avoidance effect. Additional analysis is conducted in examining whether the tax avoidance effect exists in a sub-sample. [source] Insider Trading, Earnings Management and Corporate Governance: Empirical Evidence Based on Hong Kong FirmsJOURNAL OF INTERNATIONAL FINANCIAL MANAGEMENT & ACCOUNTING, Issue 3 2007Bikki Jaggi We document positive association between earnings management and insider selling after the fiscal year-end for Hong Kong firms. This positive association is especially evident before the 1997 Asian Financial Crisis. Our findings suggest that Hong Kong executives manage reported earnings to maximize their private benefits from insider selling. Additionally, we find that a higher proportion of independent directors (INED) on corporate boards moderate the positive association between insider selling and earnings management. Stricter monitoring of earnings management by INED is especially evident when no member of the family with majority ownership is present on corporate boards as a director. This suggests that the presence of family members with majority ownership on corporate boards significantly reduces INED's monitoring effectiveness. Our findings suggest that strict regulations are needed to control insider trading, and independence of corporate boards is important for monitoring of earnings management associated with insider trading. Furthermore, appointment of family members with majority shareholdings should be avoided to enhance independence and to monitor effectiveness of corporate boards. [source] Commentary: Discount Rates in Disarray , Evidence on Flawed Goodwill Impairment TestingAUSTRALIAN ACCOUNTING REVIEW, Issue 3 2010Michael E. Bradbury Carlin and Finch (2009)compare the reported goodwill impairment discount rates to their own ,independent' estimate for a sample of 105 Australian firms. On the basis of this comparison they claim (but do not show) that the discretion in determining the discount rate ,could be used opportunistically' and ,fundamental questions must be asked about the quality of reported earnings , produced in conformity with the IFRS regime'. This commentary points out that the research design does not permit the assessment of either of these claims. [source] | ||||||||||||||||||||||