scholarly journals Equity Incentives and Earnings Management

2005 ◽  
Vol 80 (2) ◽  
pp. 441-476 ◽  
Author(s):  
Qiang Cheng ◽  
Terry D. Warfield

This paper examines the link between managers' equity incentives—arising from stock-based compensation and stock ownership—and earnings management. We hypothesize that managers with high equity incentives are more likely to sell shares in the future and this motivates these managers to engage in earnings management to increase the value of the shares to be sold. Using stock-based compensation and stock ownership data over the 1993–2000 time period, we document that managers with high equity incentives sell more shares in subsequent periods. As expected, we find that managers with high equity incentives are more likely to report earnings that meet or just beat analysts' forecasts. We also find that managers with consistently high equity incentives are less likely to report large positive earnings surprises. This finding is consistent with the wealth of these managers being more sensitive to future stock performance, which leads to increased reserving of current earnings to avoid future earnings disappointments. Collectively, our results indicate that equity incentives lead to incentives for earnings management.

2019 ◽  
Vol 27 (2) ◽  
pp. 244-261 ◽  
Author(s):  
Mohammad Alhadab ◽  
Bassam Al-Own

Purpose This study aims to examine the effect of equity incentives on earnings management that occurs via the use of loan loss provisions by using a sample of 204 bank-year observations over the period 2006-2011. Design/methodology/approach The authors use the data of 39 European banks to test the main hypothesis. Several valuation models and regressions are used to measure the main proxies for executives’ compensation and the determinant factors of loan loss provisions. Findings The empirical results reveal that earnings management that occurs via discretionary loan loss provisions is associated with equity incentives in the banking industry. In particular, European banks’ executives with high equity incentives are found to manage reported earnings upwards by reducing loan loss provisions. The results therefore show that income-increasing earnings management via discretionary loan loss provisions is widely practised by the executives of European banks and that this is partly motivated by executives’ compensation. Practical implications The findings of this paper present important implications for regulators in the European Union, who should take further steps to reform the regulatory environment to monitor and mitigate the earnings management practices that occur via the manipulation of loan loss provisions. Earnings management practices do not just negatively affect subsequent performance but are also found to lead to firms’ failure. Thus, regulators should take the necessary reforms to protect the wealth of stakeholders (investors, creditors, etc.). Originality/value This study provides the first evidence on the relationship between equity incentives and earnings management in the European banking industry. The study sheds more light on an issue of great interest to a broad audience that does not receive much attention in the prior research, thus opening new avenues for future research.


2015 ◽  
Vol 8 (2) ◽  
pp. 1787-1832 ◽  
Author(s):  
J. Heymann ◽  
M. Reuter ◽  
M. Hilker ◽  
M. Buchwitz ◽  
O. Schneising ◽  
...  

Abstract. Consistent and accurate long-term data sets of global atmospheric concentrations of carbon dioxide (CO2) are required for carbon cycle and climate related research. However, global data sets based on satellite observations may suffer from inconsistencies originating from the use of products derived from different satellites as needed to cover a long enough time period. One reason for inconsistencies can be the use of different retrieval algorithms. We address this potential issue by applying the same algorithm, the Bremen Optimal Estimation DOAS (BESD) algorithm, to different satellite instruments, SCIAMACHY onboard ENVISAT (March 2002–April 2012) and TANSO-FTS onboard GOSAT (launched in January 2009), to retrieve XCO2, the column-averaged dry-air mole fraction of CO2. BESD has been initially developed for SCIAMACHY XCO2 retrievals. Here, we present the first detailed assessment of the new GOSAT BESD XCO2 product. GOSAT BESD XCO2 is a product generated and delivered to the MACC project for assimilation into ECMWF's Integrated Forecasting System (IFS). We describe the modifications of the BESD algorithm needed in order to retrieve XCO2 from GOSAT and present detailed comparisons with ground-based observations of XCO2 from the Total Carbon Column Observing Network (TCCON). We discuss detailed comparison results between all three XCO2 data sets (SCIAMACHY, GOSAT and TCCON). The comparison results demonstrate the good consistency between the SCIAMACHY and the GOSAT XCO2. For example, we found a mean difference for daily averages of −0.60 ± 1.56 ppm (mean difference ± standard deviation) for GOSAT-SCIAMACHY (linear correlation coefficient r = 0.82), −0.34 ± 1.37 ppm (r = 0.86) for GOSAT-TCCON and 0.10 ± 1.79 ppm (r = 0.75) for SCIAMACHY-TCCON. The remaining differences between GOSAT and SCIAMACHY are likely due to non-perfect collocation (±2 h, 10° × 10° around TCCON sites), i.e., the observed air masses are not exactly identical, but likely also due to a still non-perfect BESD retrieval algorithm, which will be continuously improved in the future. Our overarching goal is to generate a satellite-derived XCO2 data set appropriate for climate and carbon cycle research covering the longest possible time period. We therefore also plan to extend the existing SCIAMACHY and GOSAT data set discussed here by using also data from other missions (e.g., OCO-2, GOSAT-2, CarbonSat) in the future.


2020 ◽  
Vol 33 (02) ◽  
pp. 431-445
Author(s):  
Azarnoosh Kafi ◽  
Behrouz Daneshian ◽  
Mohsen Rostamy-Malkhalifeh ◽  
Mohsen Rostamy-Malkhalifeh

Data Envelopment Analysis (DEA) is a well-known method for calculating the efficiency of Decision-Making Units (DMUs) based on their inputs and outputs. When the data is known and in the form of an interval in a given time period, this method can calculate the efficiency interval. Unfortunately, DEA is not capable of forecasting and estimating the efficiency confidence interval of the units in the future. This article, proposes a efficiency forecasting algorithm along with 95% confidence interval to generate interval data set for the next time period. What’s more, the manager’s opinion inserts and plays its role in the proposed forecasting model. Equipped with forecasted data set and with respect to data set from previous periods, the efficiency for the future period can be forecasted. This is done by proposing a proposed model and solving it by the confidence interval method. The proposed method is then implemented on the data of an automotive industry and, it is compared with the Monte Carlo simulation methods and the interval model. Using the results, it is shown that the proposed method works better to forecast the efficiency confidence interval. Finally, the efficiency and confidence interval of 95% is calculated for the upcoming period using the proposed model.


2016 ◽  
Vol 2 (1) ◽  
pp. 47-56
Author(s):  
Windu Mulyasari ◽  
Slamet Sugiri ◽  
Heyvon Herdhayinta

Objective: The purpose of this study is to investigate the pattern of earnings management on growth and value companies in Indonesia. This study predicts that earnings management has information contents. Therefore, earnings management tends to degrade the quality of earnings, then affect the future profitability. This study analyzes the effect of earnings management information content to the company's future profitability. This study provides an understanding about accounting information at certain market price levels for growth and value companies. Findings: Findings of this study indicate the differences between earnings management influence on growth and value companies. The results also support the differences of relative incremental information content of earnings management on growth and value companies. The growth firms tend to do earnings management and have higher profitability compared to the value firms. The implication is that the incremental information content of earnings management on growth firms is lower than those of the value firms to predict future profitability.   Implication: The contribution of this research is to provide an in-depth review on earnings management study associated with company life cycle (growth and value), as well as  to give additional understanding about the existence of incremental information content of earnings management. Thus, firms show different earnings management behaviors and ultimately those behaviors affect the quality of profit to predict future earnings


2005 ◽  
Vol 1 (2) ◽  
pp. 104
Author(s):  
DIAN MERIEWATY ◽  
ASTUTI YULI SEIYANI

Financial statements users need financial informotion of companies to analyze their financial condition and performance. Finacial rotios are useful rneasares for explaning the future earning changes. The study focuses on the usefulness of ftnancial ratios in explaning future eamings.The objective of the study is to empirically examine whether financial statement based tinancial ratios hove ability for explaning future earnings. Data in this study were in food and beverages firms listed on the Jaknrta Stock Exchange. Regression analysis were used in testing the ability financial ratios for explaning changes. The multicollinearity test shows that there is no assosiation between independent variables, indicating multieollinearity is not a seriaus problem. The heteroscedasticity test shows that voriances of disturbances are constant for all observation in independentt variables. Therefore heteroscedasticity is not a problem. The empiricolly result showed that, financial ratios in/luences the futureearnings changes for earning after tax are total debt to total capital assets, total assets turnover, and return on investment. Among those sevent financial ratios that are significant influences the future earnings changes for operating prortt is current ratio.Keywords : Financial Ratios, Performance changes of firms, significantlyinfluence.


2002 ◽  
Vol 17 (4) ◽  
pp. 431-445
Author(s):  
Jerry G. Kreuze ◽  
Jack M. Ruhl

This case uses the concepts of earnings quality and earnings management to illustrate the inherent ambiguity in the earnings measurement process. Accounting students are often uncomfortable with ambiguity. Students want faculty to provide them with a single correct answer, such as the precise earnings for a given time period. Accounting textbooks rarely address this perception; we have yet to find a textbook that illustrates a range of acceptable amounts. This case demonstrates that earnings can be, and often are, ambiguous in the real world.


2015 ◽  
Vol 3 (2) ◽  
pp. 141 ◽  
Author(s):  
Piotr Wójtowicz

<p>Earnings management in Polish listed companies was the subject of only several studies, mainly theoretical, but none of them is related to earnings management to meet analysts’ expectations. The aim of the paper is to detect any signals of earnings management to achieve zero or small positive earnings surprises. The sample comprises 609 observations from years 2012-2014 related to medium size companies listed at Warsaw Stock Exchange. Distribution of scaled annual earnings surprise (difference between realized and forecasted earnings scaled by beginning total assets) is analyzed. It contains unusually high frequency of small positive surprises. If the module of earnings surprise is small it is more probable that the real value was higher than the forecast - meeting or beating the forecast, so small positive earnings surprises are more probable than negative. If the module of earnings surprise is high it is more probable that the forecast of income was higher than the real value - neither meeting nor beating the forecast. Results are not sensitive to the choice of earnings surprise metric.</p>


2019 ◽  
Vol 27 (5) ◽  
pp. 577-590
Author(s):  
Hyejeong Shin ◽  
Heejeong Shin ◽  
Su-In Kim
Keyword(s):  

2002 ◽  
Vol 05 (03) ◽  
pp. 417-438 ◽  
Author(s):  
Sheng-Syan Chen ◽  
Kim Wai Ho ◽  
Cheng-Few Lee ◽  
Gillian H. H. Yeo

We find that Singapore listed firms which have conducted private placements subsequently experience long-run stock underperformance. The long-run underperformance is more severe for small firms and firms with a higher book-to-market ratio. This suggests that small firms and firms with poorer growth prospects are more likely to time the issue when the stock is temporarily overvalued. Further more, we find a positive relation between the long-run stock performance and the change in ownership concentration of the issuing firms, which is consistent with the alignment-of-interests hypothesis. We do not find evidence supporting the earnings-management hypothesis.


2011 ◽  
Vol 43 (6) ◽  
pp. 371-386
Author(s):  
Mariah Webinger

Stock incentives for bank management in the 1990s increased and may have allowed management too much freedom in making risk choices and ignited the credit crisis of 2008. Contracting theory suggests stock incentives will induce better stock performance; moral hazard theory suggests stock incentives will motivate managers to undertake risky projects. This study finds, in the period of 2005-2007, CEO options are associated with negative performance supporting moral hazard theory. However, stock ownership is associated positively with performance as measured by earnings, supporting contracting theory. Director options are associated positively with performance but are not significant in for stock ownership.


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