Investigating the Using Methods of Management Discretion in Future Profitability Reporting and the Effect of Firms’ Characteristics on Using Methods of These Discretions.

Document Type : Research Paper

Authors

Abstract

The purpose of this study is to investigate the using methods of management discretions in future profitability reporting of companies listed on the Tehran Stock Exchange (TSE). Accordingly, we investigate the type of earnings management in these companies in terms of opportunistic or efficient earnings management. In addition, in this research we investigate the effect of five characteristics including firm size, deviance in operating activities, predict of future profits growth, debts contracts and growth of sales on the type of earnings management in companies listed on the TSE. For this purpose, we develop and test six hypotheses in four different modes by using multiple regressions.
The results of testing first hypothesis show that managers of stock companies use of own discretions to communicate private information about firm’s future profitability, and this is in accordance with definition of efficient earnings management. Also, results of the second to sixth hypothesis tests indicate that the in some of four different modes, efficient earnings management has a positive and significant relationship with deviance in firm operating activities,

Keywords

References

-    پورحیدری امید، افلاطونی عباس (1385)، “بررسی انگیزه‌های هموارسازی سود در شرکت‌های پذیرفته شده در بورس اوراق بهادار تهران”، بررسی‌های حسابداری و حسابرسی، شماره 44، ص 70-55.
-    سجادی، سید حسین؛ دستگیر، محسن؛ فرازمند، حسن؛ حبیبی، حمیدرضا (1387)، “عوامل موثر بر مدیریت سود در شرکت‌های پذیرفته شده در بورس اوراق بهادار تهران”، مجله پژوهشهای اقتصادی، شماره 8، ص 159-129.
-     -Abarbanell. J., and Lehavy. R. (2003). “Can stock recommendations predict earnings management and analysts’ earnings forecast errors?”, Journal of Accounting Research, Vol. 41, No 1.
-     Aljifri, K. (2007). “Measurement and Motivations of Earnings Management: A Critical Perspective”. Journal of Accounting – Business & Management, Vol. 14, pp. 75-95.
-     Albrecth,W.D., and Richardson, F.M., (1990). “Income smoothing by economy sector”, Journal of Business Finance and Accounting, Vol. 17, No. 5, pp. 713−730.
-     Balsam, S., Bartov, E., and Marquardt, C. (2002). “Accruals management, investor sophistication, and equity valuation: Evidence from 10-Q filings”, Journal of Accounting Research, Vol. 40, No. 4, pp. 987−1012.
-     Barton, J.J., and Simko, P.J. (2002). “The balance sheet as an earnings management constraint”. The Accounting Review (Supplement), pp. 1-27.
-     Barth, M., Elliott, J., and Finn, M. (1999). “Market rewards associated with patterns of increasing earnings”. Journal of Accounting Research, Vol. 37, pp. 387-413.       
-     Belkaoui, A. (2004). “Accounting Theory”. Thomson.
-     Beneish, M.D. (2001). “Earnings management: A perspective”. Managerial Finance, Vol. 27, No. 12, pp. 3–17.
-     Beatty, A., Ke, B., and Petroni, K. (2002). “Earnings management to avoid earnings declines across publicly and privately held banks”. Accounting Review, Vol. 77, pp. 547-570.
-     Bhattacharya, N. (2001). “Investors' trade size and trading responses around earnings announcements: An empirical investigations”, Accounting Review, Vol. 76, No. 2, pp. 221−244.
-     Burgstahler, D., and Dichev, I. (1997). Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economics, Vol. 24, pp. 99−126.
-     DeAngelo, H., DeAngelo, L. and Skinner, D.J. (1994). “Accounting choice in troubled companies”. Journal of Accounting and Economics, Vol. 17, pp. 113-143.
-     Dechow, P.M., and Dichev, I.D. (2002). “The quality of accruals and earnings: The role of accrual estimation errors”. Accounting Review, (Supplement), pp. 35-59.
-     Dechow, P.M., Sloan, R.G., and Sweeney, A.P., (1995). “Detecting earnings management”, Accounting Review, Vol. 70, pp. 193−225.
-     Defond, M., and Jiambalvo, J. (1994), “Debt covenant violation and manipulation of accruals”, Journal of Accounting and Economics, Vol. 17, pp. 145-176.
-     Dhaliwal, D.S., (1980), “The effect of the firm’s capital structure on the choice of accounting methods”, Accounting Review, Vol. 55, pp. 78-84.
-     Frankel, R.M., Johnson, M.F. and Nelson, K.K. (2002). “The relation between auditor’s fees for nonaudit services and earnings management”.Accounting Review, (Supplement), pp. 71-106.
-     Gul, F.A., Lung, S., and Srinidhi, B. (2000). “The effect of investment opportunity set and debt level on earnings–returns relationship and the pricing of discretionary accruals”, Unpublished Working Paper.
-     Habib, A. (2005), “Firm-specific determinants of income smoothing in Bangladesh:an empirical evaluation,” Advances in International Accounting, Vol. 18, pp. 53-71.
-     Herrmann, D and Inoue, T. (1996), “Income smoothing and incentives by operating condition: An empirical test using depreciation change in Japan,” Journal of International Accounting, Auditing and Taxation, Vol. 5, No. 2, pp. 161-177.
-     Jaggi, B., and Picheng, L., (2002), “Earnings management response to debt covenant violations and debt restructuring”, Journal of Accounting, Auditing & Finance; Vol. 17, Issue 4, pp. 295-324.
-     Jones, J.J. (1991). “Earnings management during import relief investigation”, Journal of Accounting Research, Vol. 29, pp. 193−228.
-     Kothari, S.P., Leone, A.J. and Wasley, C.E. (2005). “Performance matched discretionary accrual measures”, Journal of Accounting and Economics, Vol. 39, pp. 163–197.
-     Kasznik, R. (1999). “On the association between voluntary disclosure and earnings management”, Journal of Accounting Research, Vol. 37, pp. 57−81.
-     Ke, B.K. (2001). “Why do CEOs of publicly traded firms prefer reporting small earnings increases and long strings of consecutive earnings increases?”, Working Paper, Pennsylvania State University.
-     Krishnan, G. (2003). “Audit quality and the pricing of discretionary accrual”, Auditing, Vol. 22, pp. 109−126.
-     Lee, B.B., and Choi, B. (2002). “Company size, auditor type, and earnings management”, Journal of Forensic Accounting, III, pp. 27−50.
-     Levitt, A., (2000). “Testimony concerning commission's auditor independence proposal before the senate subcommittee on securities committee on banking, housing, and urban affairs”, September 28, 2000, http://www.sec.gov/news/testmony/ts152000.htm.
-     Matsumoto, D.A. (2002). “Management’s incentives to avoid negative earnings surprises”. Accounting Review, Vol. 77, Vol. 483–514.
-     McNichols, M. (2000). “Research design issues in earnings management studies”. Journal of Accounting and Public Policy, Vol. 19 No. 4-5, pp. 313-345.
-     Moses, O.D. (1987). “Income smoothing and incentives”. Accounting Review, Vol. 62 (April), pp. 358-375.
-     Ndubizu, G,A. and Tsetsekos, G,P. (1991), “Functional currency smoothing and managerial incentives: An empirical test,” International Journal of Accounting, Vol. 27, pp. 27-37.
-     Ronen, J., and Yaari, V.L., (2008). “Earnings Management: Emerging Insights in Theory, Practice, and Research”. Springer.
-     Saleh, N.M., and K. Ahmed, (2005), “Earnings management of distressed firms during debt renegotiation”, Accounting & Business Research; Vol. 35, Issue 1, pp. 69-86.
-     Siregar S.V., and Utama, S. (2008), “Type of earnings management and the effect of ownership  structure, firm size, and corporate-governance practices: Evidence from Indonesia”, International Journal of Accounting, Vol. 43, pp. 1-27
-     Skinner, D.J. and Sloan, R.G., (2002). “Earnings surprises, growth expectations and stock returns or don't let a torpedo stock sink your portfolio”. Review of Accounting Studies, Vol. 7, pp. 289-312.
-     Subramanyam, K.R. (1996). “The pricing of discretionary accruals”, Journal of Accounting and Economics, Vol. 22, pp. 249−281.
-     Sweeny, A.P., (1994), “Debt-covenant violations and managers’ accounting responses”, Journal of Accounting and Economics, Vol. 17, pp. 281-308.

Files

History

  • Receive Date: 02 March 2011
  • Revise Date: 30 May 2012
  • Accept Date: 30 January 2012

Share

How to cite

Statistics