WWW.ABSTRACT.DISLIB.INFO
FREE ELECTRONIC LIBRARY - Abstracts, online materials
 
<< HOME
CONTACTS



Pages:   || 2 | 3 |

«ijcrb.webs.com JANUARY 2012 VOL 3, NO 9 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS Efficient or opportunistic earnings management ...»

-- [ Page 1 ] --

ijcrb.webs.com JANUARY 2012

VOL 3, NO 9

INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

Efficient or opportunistic earnings management with regards to the role of

firm size and corporate governance practices

Farzin Rezaei* (Corresponding author) 

Assistant Professor of Accounting and Management faculty, Qazvin Branch, Islamic Azad University, Qazvin, Iran.

Maryam Roshani M.A. Student of Financial Management, Qazvin Branch, Islamic Azad University, Qazvin, Iran.

Abstract The purpose of this study is to examine the type of earnings management in Iran and to investigate it, the effect of discretionary accruals, as a proxy for earnings management, on future profitability has been examined. Also we consider the effect of firm size, ownership structure, audit quality and the proportion of independent board members on it. In this research, a sample of 167 firms in a 6 year financial period from 2004 to 2009 has been analyzed and fixed effect regression method is applied. The results show that managers tends to use efficient earnings management in Iran and firm size, ownership structure, audit quality and the proportion of independent board members can influence on the type of earnings management.

Key words: Efficient earnings management, opportunistic earnings management, discretionary accruals, corporate governance practices, firm size  

1. Introduction  Financial reporting is so important to all users of financial statements in making decisions, that the study of EM(Earnings Management) is expected to be very useful to them (Al-khabash & Al-Thuneibat, 2009). According to public perception, earnings management occurs “when managers use judgment in financial-reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers” (Healy & Wahlen, 1999).

Managers can use earnings management to deliver some useful and superior information which they know about firm performance to shareholders and debt holders. If this is the case, then, earnings management may not be harmful to the stockholders and the public. On the other hand, the financial scandals at Enron and WorldCom changed the nature of earnings management toward an opportunistic view. With regards to this view, managers manage earnings for their own private benefits rather than for the benefits of the stockholders (watts and Zimmerman, 1986; Subramanyam, 1996; Holthausen, 1990; Healy and Palepu, 1993; Guay, Kothari, and Watts, 1996; Demski, 1998; Arya, Glover, and Sunder, 2003; Hao, 2010 & jiraporn, 2008).

Firm size can influence on the type of earnings management. Generally large companies have developed internal control systems, audited by audit firms with long history and also take into consideration the reputation costs when they engage in earnings management (Kim et al. 2003). With reference to these reasons we expect that large sized firms are tend to apply opportunistic earnings management less than those in smaller firms.

Institutional investors have the opportunity, resources and ability to monitor, discipline and influence a manager’s decision in the firm (Chung et al. 2002; Monks and Minow, 1995). So they are more able of detecting opportunistic earnings management than non-institutional investors.

Independent directors are supposed to monitor management activities in favor of shareholders. The findings of Dechow et al. (1996) and Beasley (1996) show that higher proportion of independent directors, more confidence in the firm’s financial reporting system.

High quality auditors are more likely and able to detect questionable accounting practices, and report material errors and irregularities than low quality auditors. Because high quality auditors have the expertise, resources, and incentives to separate the information component from noise, they can enhance the informativeness of discretionary accruals by constraining aggressive and opportunistic reporting of accruals by managers (Krishnan, 2003).

–  –  –

Findings of Prior Researches  2.

2.1. Prior research on type of earnings management   The findings  of  Siregar and  Utama  (2008)  imply that earnings  management  tends  toward  efficient  in  Jakarta.  Also they find that firms with a high proportion of family ownership and non‐business groups are more inclined to  choose efficient earnings management than other types of firms.  Subramanyam (1996) examines if current-period discretionary accruals help predict future cash flows, earnings, and dividends. It is expected that accruals should help predict cash flow if discretionary accruals increase the information content for current earnings-related future performance. He finds evidence consistent with this hypothesis, suggesting that discretionary accruals do add informational content to earnings.

Jiraporn et al. (2008) offer agency theory as a tool to distinguish between the opportunistic and beneficial uses of earnings management. The empirical evidence suggests that firms where earnings management occurs to a larger (less) extent suffer less (more) agency costs. Moreover, a positive relation is documented between firm value and the extent of earnings management. Taken together, the results reveal that earnings management is, on average, not detrimental.





2.2. Prior research on earnings management and firm size  Kim et al. (2003) find that small firms engage in more earnings management than large or medium-sized firms to avoid reporting losses. On the other hand, large and medium-sized firms exhibit more aggressive earnings management to avoid reporting earnings decreases than small sized firms.

Lee and Choi (2002) also find that small companies tend to more frequently manage earnings to avoid losses than do large companies. But, Moses (1987) finds evidence that large firms have more incentive to smooth earnings than small firms.

2.3. Prior research on earnings management and corporate governance  Chung et al., (2002) find evidence supporting that the presence of large institutional shareholdings inhibit managers from increasing or decreasing reported profits towards the managers’ desired level or range of profits.

This evidence is consistent with institutional investors monitoring and constraining the self-serving behavior of corporate managers.

Rajgopal, Venkatachalam, and Jiambalvo, (2002), Jiraporn and Gleason (2007), Koh (2005) and Mashayekhi (2008) argued that institutional share ownership may have implications for earnings management as they are able to influence the company’s management. The results indicate that institutions with large shareholdings play an active role in monitoring managerial opportunism in managing the reported earnings.

The findings of Dechow et al. (1996) and Beasley (1996) imply that higher proportion of outside directors in the Board Committee is associated with greater confidence in the firm’s financial reporting system.

Klein (2002) examines whether board attributes are related to earnings management among S&P 500 firms for the period 1992-1993. She finds a significant and negative association between the incidence of abnormal accruals and (a) the percentage of independent directors on the board and (b) the fact that outsiders account for the majority of board members.

Jaggi et al. (2009) find that independent corporate boards of Hong Kong firms provide effective monitoring of earnings management, which suggests that despite differences in institutional environments, corporate board independence is important to ensure high-quality financial reporting.

Norman et al. (2005) and Kam (2007) find that outside directors do not reduce the incidence of earnings management.

Osma & Noguer (2005) investigated whether corporate governance mechanisms are effective in constraining earnings manipulation for Spanish companies during the period 1999-2001. They analyzed the association between earnings management and two key aspects of corporate governance: board composition and the existence of board monitoring committees. The results show that board composition significantly determines earnings manipulation practices. However, the main role in constraining such practices is not played by independent directors, as UK and COPY RIGHT © 2012 Institute of Interdisciplinary Business Research ijcrb.webs.com JANUARY 2012 VOL 3, NO 9

INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

US based research suggests, but by institutional directors. The study found no correlation between the existence of an independent audit committee and earnings management measures.

The results of Al-Abbas et al. (2009) provide no evidence that corporate governance factors mitigate against earnings management in the Saudi environment. However, auditing firm’s size negatively relates to abnormal accruals, which indicates that auditing firm’s size is an important factor with regard to the extent of earnings management.

DeAngelo (1981) argues that auditor size is a proxy for auditor reputation and audit quality. She reasons that brand-name auditors (i.e., Big 5 auditors) are better able to detect material misstatements in financial statements and more willing to report what they find than are other auditors (i.e., non-Big 5 auditors).

Zhou and Elder (2003) and Chen et al (2005) find that Big 4 auditors associate with less earnings management in the firms.

3. Literature review and hypotheses development 

3.1. The type of earnings management  There is a public perception that earnings management is utilized opportunistically by firm managers for their own private gain rather than for the benefit of the stockholders. This misalignment of managers' and shareholders' incentives could induce managers to use the flexibility provided by the accounting standards to manage income opportunistically, thereby creating distortions in the reported earnings. However, a number of academic studies have argued that earnings management may be beneficial because it potentially enhances the information value of earnings. Managers may exercise discretion over earnings to communicate private information to stockholders and the public (Al Fayoumi et al, 2010).

Therefore, we test whether earnings management is efficient or opportunistic by examining the effect of discretionary accruals on future profitability. If the effect of discretionary accruals on future profitability is positive, then the type of earnings management will be efficient. If the effect of discretionary accruals on future profitability is negative or they don't have any significant relationship, then the type of earnings management will be opportunistic.

Hypothesis 1. There is a relationship between discretionary accruals and future profitability.

3.2. The effect of company size on the type of EM  The firm size may have an effective role in constraining opportunistic earnings management. First, the size of a firm is related to the internal control system. Larger companies may have more sophisticated internal control systems and have more expert internal auditors in comparison to smaller companies.

Second, large firms are usually audited by large sized audit firms (big 5 CPA firms). Large CPA firms tend to have more experienced auditors that in turn could help prevent earnings misrepresentation.

Third, large firms take into consideration the reputation costs when engaging in earnings management. Large firms have usually grown up with a long history during which they may have better appreciation of market environment, better control over their operations and better understanding of their businesses relative to small firms.

Therefore, their concern about reputations may prevent large firms from manipulating earnings (Kim et al. 2003).

According to above reasons we expect that large companies are more likely to manage earnings efficiently than opportunistically, and so there will be a positive relationship between discretionary accruals and future profitability.

Hypothesis 2. Earnings management tends toward efficient in large firms.

3.3. The effect of corporate governance practices on the type of EM  Relying on Earnings numbers are more when management’s opportunistic behaviour is controlled (Wild, 1996;

Dechow et al., 1996; Klein, 2002; Peasnell et al., 2000 & Bugshan, 2005).

Large shareholders are often considered as sophisticated investors (Balsam et al., 2002; Jiambalvo et al., 2002 & Collins et al., 2003). they have the ability to play a more active role in monitoring and disciplining management than small shareholders, which might alleviate earnings management (Rifi, 2010).

Therefore, we test the following hypothesis.

Hypothesis 3. Earnings management tends toward efficient in firms with high proportion of institutional ownership.

Board of directors play an important role in monitoring management to protect shareholders’ interest. The Board Committee consists of executive directors and independent non-executive directors. The role of independent nonexecutive directors is to bring independent judgment to the Board (Yang, 2009). As outside members do not play a COPY RIGHT © 2012 Institute of Interdisciplinary Business Research ijcrb.webs.com JANUARY 2012 VOL 3, NO 9

INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

direct role in the management of the company, their existence may provide an effective monitoring tool to the board and thus produce higher quality financial reports (Hashim & Devi, 2008).

With reference to above reasons, we expect that firms with high independent board members are more likely to manage earnings efficiently than opportunistically, and so there will be a positive relationship between discretionary accruals and future profitability.

Hypothesis 4. Earnings management tends toward efficient in firms with high proportion of independent board members.

The most commonly used audit quality proxy is auditor size (e.g., Tendeloo and Vanstraelen 2008; Piot and Janin, 2006; Krishnan, 2003; Vander Bauwhede et al., 2000; Becker et al., 1998). Big-4 auditors have reputation and they are more experienced (Krishnan, 2003) and more conservative in their opinion (Piot and Janin, 2006), they are more likely to constrain earnings management.



Pages:   || 2 | 3 |


Similar works:

«How airlines can accelerate redemption in reward program Encourage engagement with early redemption Reaching The Golden Moment – why delayed gratification is a bad thing Meet Bert, Rewards Manager for Standstill Airlines. Bert is preparing his first six-month review of his “fantastic” new customer rewards programme. Every customer has been enrolled automatically and has an information pack. He’s chosen great, aspirational rewards that his customer insight shows appeals to his most...»

«CURRICULUM VITAE Jakob Brøchner Madsen Ph: +61-990 32 134 Department of Economics Fax: +61-990 31 128 Monash University jakob.madsen@monash.edu Victoria Australia Nationality: Danish. Permanent residency: Australia. Civil status: Married, 2 children.EDUCATION: 1990-1991 PhD in Economics, Department of Economics, Research School of Social Sciences, Australian National University. Title of PhD thesis: Unemployment in the OECD: A Macroeconomic Study. 1988-1989 Advanced Studies Program in Economic...»

«American Journal of Business Education – July 2011 Volume 4, Number 7 The Defense Life Cycle Management System As A Working Model For Academic Application Philip E. Burian, Colorado Technical University – Sioux Falls, USA Leslie M. Keffel, Colorado Technical University – Colorado Springs, USA Francis R. Maffei III, Colorado Technical UniversityOnline, USA ABSTRACT Performing the review and assessment of masters’ level degree programs can be an overwhelming and challenging endeavor....»

«Ofgem new balancing services consultation Ofgem consultation Potential requirement for new balancing services by National Grid to support a mid-decade electricity security of supply outlook Submission by GDF SUEZ Energy International (I) About GDF Suez Energy International GDF SUEZ Energy International (formerly known as International Power) is responsible for GDF SUEZ‟s energy activities in 30 countries across five regions worldwide (Latin America; North America; South Asia, Middle East &...»

«MULTIANNUAL INDICATIVE PROGRAMME (MIP) FOR CUBA 2014-2020 LIST OF ACRONYMS AECID Spanish Agency for International Cooperation BASAL Bases Ambientales para la Sostenibilidad Alimentaria Local (Environmental bases for sustainability of local food production) CIDA Canadian International Cooperation Agency CITMA Ministry of Science, Research and Environment COSUDE Swiss Agency for Development and Cooperation CSP Country Strategy Paper DCI – Development Cooperation Instrument DRR Disaster Risk...»

«NBER WORKING PAPER SERIES GLOBAL IMBALANCES AND THE LESSONS OF BRETTON WOODS Barry Eichengreen Working Paper 10497 http://www.nber.org/papers/w10497 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 May 2004 The views expressed herein are those of the author(s) and not necessarily those of the National Bureau of Economic Research. ©2004 by Barry Eichengreen. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without...»

«Financial Intermediation and Economic Development: A Quantitative Assessment∗ Pedro S. Amaral Erwan Quintin Southern Methodist University Federal Reserve Bank of Dallas University of Minnesota April 2, 2007 Abstract We present a model in which the importance of financial intermediation for economic development can be measured. We generate financial differences by varying the degree to which contracts can be enforced. Economies where enforcement is poor direct less capital to the production...»

«LEADERSHIP FOR INNOVATION: FUNDAMENTALS OF HUMAN INFLUENCE Robert W. Service Samford University James P. Reburn Samford University ABSTRACT In today’s hypercompetitive global world of commerce there are two organizational imperatives. The first organizational imperative is to have a distinctive that explains what attracts customers: why someone would do business with your organization. Second is the imperative to become and remain innovative which is absolutely necessary to assure that an...»

«REVSTAT – Statistical Journal Volume 10, Number 1, March 2012, 109–133 MODELLING TIME SERIES EXTREMES Authors: V. Chavez-Demoulin – Faculty of Business and Economics, University of Lausanne, 1015 Lausanne, Switzerland valerie.chavez@unil.ch A.C. Davison – Ecole Polytechnique F´d´rale de Lausanne, EPFL-FSB-MATHAA-STAT, ee Station 8, 1015 Lausanne, Switzerland anthony.davison@epfl.ch Abstract: • The need to model rare events of univariate time series has led to many recent advances in...»

«Los Angeles City Council, Journal/Council Proceeding Wednesday, November 20, 2013 JOHN FERRARO COUNCIL CHAMBER ROOM 340, CITY HALL 200 NORTH SPRING STREET, LOS ANGELES, CA 90012 10:00 AM (For further details see Official Council Files) (For communications referred by the President see Referral Memorandum) ROLL CALL Members present: Bonin, Cedillo, Englander, Fuentes, Huizar, Koretz, LaBonge, Martinez, O'Farrell, Price (10); Absent: Blumenfield, Buscaino, Krekorian, Parks and President Wesson...»

«Tomaž Mastnak 321.64:141.7”20” 327.8(477)”2013/2014” Nazism and 551.583:316.75 Climate Change Abstract: The author argues that the urgency of thought today is about facing the twin threats of resurrected Nazism and climate change. While climate change is spelling an un-apocalyptic end of the world, the resurrection of Nazism is feeding into climate change. A case in point is the regime change in Ukraine, where Nazi violence is being used to ensure the implementation of a radical...»

«Creighton University Faculty Bibliography 2009-2010 Table of Contents Introduction A Sampling of Creighton University’s Research Endeavors Center for Health Policy and Ethics College of Arts and Sciences Department of Chemistry College of Business School of Dentistry School of Law School of Medicine Department of Biomedical Sciences Department of Medical Microbiology and Immunology Department of Medicine: Division of Cardiology Department of Pharmacology School of Nursing School of Pharmacy...»





 
<<  HOME   |    CONTACTS
2017 www.abstract.dislib.info - Abstracts, online materials

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.