Revenue Manipulation and Restatements by Loss Firms

2008 ◽  
Vol 27 (2) ◽  
pp. 1-29 ◽  
Author(s):  
Jeffrey L. Callen ◽  
Sean W. G. Robb ◽  
Dan Segal
Keyword(s):  
Firm Value ◽  
Cash Flows ◽  
Positive Relation ◽  
Credit Policy ◽  
Accounts Receivable ◽  
Market Participants ◽  
Ex Ante ◽  
Value Loss ◽  
History Of ◽  
Loss Firms

SUMMARY: This paper investigates the relation between the extent of a firm’s past and expected future losses or negative cash flows and the ex ante probability that it will manipulate revenues. When a firm has a string of losses or negative cash flows, traditional valuation models do not yield reliable estimates of firm value, and traditional price-earnings ratios are not meaningful. Evidence suggests that market participants tend to value loss firms on the basis of the level and growth in revenues, rather than cash flows and earnings, thereby motivating these firms to overstate revenue. In fact, empirical results indicate that there is a positive relation between the number of years that firms exhibit and/or anticipate losses or negative cash flows and investment in receivables after controlling for credit policy. We further show that the ex ante likelihood that firms manipulate revenue in violation of GAAP is positively associated with the history of past and expected future losses or negative cash flows, as well as with the investment in accounts receivable (adjusted for credit policy). Our results suggest another indicator of manipulation that may be used by auditors and regulators in identifying firms that are more likely to overstate revenues.

scholarly journals Data Truncation Bias, Loss Firms, and Accounting Anomalies

2011 ◽  
Vol 86 (4) ◽  
pp. 1445-1475 ◽  
Author(s):  
Siew Hong Teoh ◽  
Yinglei Zhang
Keyword(s):  
Market Efficiency ◽  
Positive Relation ◽  
Data Errors ◽  
Ex Post ◽  
Data Truncation ◽  
Ex Ante ◽  
Return Distributions ◽  
Loss Firms ◽  
Positive Return ◽  
Extreme Returns

ABSTRACT Ex post trimming of extreme returns observations that are not data errors causes spurious inferences in tests of market efficiency and behavioral explanations for anomalies. Trimming causes a downward truncation bias in estimated mean returns that is stronger in ex ante subsamples with more loss firms and in which return distributions are more right-skewed. There is an asymmetric U-shaped relation between return right-skewness and loss frequency across deciles of negative return predictors (Accruals, ΔNOA, and NOA), and a downward sloping relationship for positive return predictors (CFO and FCF). Consequently, a least-trimmed square (LTS) 1 percent deletion of returns induces a spurious inverted-U-shaped relation between returns and negative predictors, and an exaggerated positive relation for positive predictors. Thus, the resulting trimmed relations do not reject behavioral explanations for these anomalies. Trimming also induces a spurious loss anomaly. These findings highlight that in return prediction studies, observations should not be deleted based upon the values of the dependent variable, only based upon clearly identified data errors.

Non-public contracts, cash flows and firm value: the case of Lockheed

2014 ◽  
Vol 13 (3) ◽  
pp. 274-290
Author(s):  
Shreesh Deshpande ◽  
Vijay Jog
Keyword(s):  
Firm Value ◽  
Stock Price ◽  
Public Information ◽  
Cash Flows ◽  
Content Type ◽  
Market Participants ◽  
Stock Price Reaction ◽  
Public Contracts ◽  
The Government ◽  
Material Information

Purpose – This study aims to examine a large, non-disclosed production contract awarded to Lockheed Corp. in the context of a trade-off between a contractually required non-disclosure clause and the need (as a publicly traded firm) to disclose material information to its shareholders. This production contract generated significant cash flows to the firm as evidenced by growth in its earnings. However, the existence of the production contract and its contribution to Lockheed’s earnings, was not disclosed by the firm to shareholders and potential investors while the production contract was being executed. Design/methodology/approach – The authors examine the market reaction to several key contract events which were not disclosed at the time they occurred, in compliance with the contractually required non-disclosure clause. Findings – A statistically significant stock price reaction around the time of the award of this non-public contract, indicative of trading by some capital market participants using non-public information was documented. Originality/value – Because similar large non-public contracts funded by the government are common in the industrial economy, we conclude by discussing implications for organizational structure, firm’s cost of capital, equity-based compensation and market efficiency.

ANALISIS EKSPOSUR EKONOMI DAN FAKTOR-FAKTOR YANG MEMPENGARUHINYA PADA PERUSAHAAN ROKOK YANG TERCATAT DI BEI

Wahana ◽  
2019 ◽  
Vol 21 (2) ◽  
pp. 98-109
Author(s):  
Ida Musdafia Ibrahim ◽  
Arif Haryono
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Cash Flow ◽  
Firm Value ◽  
Tobacco Industry ◽  
Cash Flows ◽  
Least Square ◽  
Exchange Rate Risk ◽  
Positive Effects ◽  
Rate Risk

This study aims to analyze economic exposures and its factors namely exchange rates and inflation, that influence firm value as reflected through firm cash flow. Analytical method used Ordinary Least Square and eviews as analytical tool. This study used secondary data and cigarette industry companies listed on the Indonesia Stock Exchange as samples along 2008 to 2017. Samples choosing method used purposive sampling based on determined criterias. The results showed that partially economic exposure had positive effects on firm value but insignificant. These could be seen from the economic exposure factors influncenced namely exchange rates and inflations.The exchange rate risk has low influenced cash flow was caused of the tobacco industry has low level of export/import.Enhance,inflation also had low effect on cash flow was caused of the tendency of cigarette consumers will continue to buy cigarettes even though its price increases. In short, economic exposure in the tobacco industry has low influence toward firms value. Hence, simultaneously changes in exchange rates and inflation which are economic exposure indicators have a significant effect on cash flows.  Keywords: Economic Exposure, Exchange Rate Risk, Inflation Risk, Firms Value, Cash Flow

An Analysis of the Sources of Value Loss Following Financial Restatements

2021 ◽  
pp. 0148558X2198991
Author(s):  
Philip K. Hong ◽  
Jaywon Lee ◽  
Sang-Hyun Park ◽  
Sukesh Patro
Keyword(s):  
Stock Returns ◽  
Cash Flow ◽  
Discount Rate ◽  
Stock Price ◽  
Cash Flows ◽  
Financial Fraud ◽  
Earnings Persistence ◽  
Flow Component ◽  
Financial Restatements ◽  
Value Loss

We decompose the total value loss around firms’ announcements of financial restatements into components arising from investors’ revisions in cash flows and discount rates. First, relative to population benchmarks, restatements represent circumstances in which the cash flow component becomes more important in explaining valuations. While we find significant contributions from both sources, with the cash flow component explaining more than 33% of the variation in stock returns surrounding restatement announcements, this component explains only 13% to 22% in comparable non-restating firms. When restatements are caused by underlying financial fraud, the discount rate impact becomes more important, explaining about 88% of return variation. On the contrary, the cash flow impact is relatively larger for firms with higher earnings persistence or restatements associated with errors. Our decomposition of the value loss helps explain returns in the post-announcement period. Firms with a higher relative discount rate impact experience a significant downward stock price drift after the initial announcement-related price decline. For firms with a higher relative cash flow impact, the evidence suggests the initial impact of the restatement announcement is more complete with no subsequent drift pattern. Our findings close gaps in the evidence on financial restatements and extend the literature on the drivers of stock price movements.

Debt Covenants and Accounting Manipulation

2021 ◽  
Author(s):  
Volker Laux
Keyword(s):  
Firm Value ◽  
Accounting Information ◽  
Debt Covenants ◽  
Control Rights ◽  
Ex Ante ◽  
Per Se

This paper studies the effects of allocating control rights to lenders via debt covenants when managers can sometimes misreport the accounting information on which the covenants are based. When contract renegotiation is exogenously prohibited, including a covenant in the contract is ex ante optimal because it increases both the probability that poor projects are liquidated and the manager's effort incentive. When the parties can renegotiate the contract, the results can flip: Granting the lender more control can lead to less frequent liquidations of low-quality projects and lower managerial effort incentives and thereby reduce the manager's ex ante payoff. The key behind these results is not the manager's incentive to misreport per se but her desire to take subsequent actions that conceal the misreporting. The model generates predictions regarding the determinants of accounting-based covenants, and the effects of covenants on misreporting, managerial effort, the frequency of liquidations, and firm value.

FINANCIAL DERIVATIVES - INTEREST RATE SWAP

2004 ◽  
Vol 10 (3-4) ◽  
pp. 161-168
Author(s):  
Zoran Ivanović ◽  
Elvis Mujačević
Keyword(s):  
Cash Flows ◽  
Basic Form ◽  
Over The Counter ◽  
Interest Rate Swap ◽  
Market Participants ◽  
Forward Contract ◽  
Financial Derivative ◽  
Future Cash Flows ◽  
Interest Payments ◽  
Rate Swap

Swap as a portfolio of forward contract is a financial derivative traded on the over-the-counter market. In its basic form, swap is based on the exchange of future cash flows between two market participants in accordance with the agreed terms. The cash flows that are exchanged are the interest payments and in some circumstances even the notional amount, and transactions are carried out in a period of two to thirty years. Swaps first appeared in 80's, and have evolved from back-to-back loans.

scholarly journals FORMATION OF THE REGULATION OF THE NATIONAL ECONOMY’S FINANCIAL SECTOR

2021 ◽  
Author(s):  
Roman Sharavara
Keyword(s):  
Financial Market ◽  
Financial Services ◽  
Technological Development ◽  
Financial Sector ◽  
Cash Flows ◽  
Financial Supervision ◽  
National Regulation ◽  
Market Participants ◽  
Modern Economic ◽  
National Economies

An analysis of the applied forms of cross-sectoral approach to the organization of supervision and regulation of the financial sector of different types of national economies, including the Ukrainian one, is presented. Particular attention is paid to the role of the central bank in improving the coordination of regulators of the national financial market. It is determined that effective financial supervision, in the modern sense, should combine the performance of three key functions: macroprudential supervision, microprudential supervision and business integrity supervision. With technological development, the integration of financial sector segments and the emergence of complex financial products, the segmental core of regulation has been lost. One of the main current problems is to identify the risks posed by integrated financial instruments, financial corporations take them on, and also track the ways in which they spread. Institutional and sectoral models of financial supervision are analyzed. A common feature of institutional and functional approaches is the growing need to improve the coordination of national financial regulators and comprehensively increase its efficiency. The expediency of creating a macro-regulator in the conditions of modern economic systems is substantiated. The possibility of consolidated supervision is revealed, which eliminates interdepartmental conflict of interests, better control of transactions and cash flows. Peculiarities of macroregulators functioning in Great Britain, Australia, and the Netherlands have been studied. Developing a unified approach can increase the speed of response to identified threats and its adequacy, as well as reduce regulatory arbitrage by supervised organizations. The mega-regulator is able to provide due attention to the control of the integrity of business by financial market participants, protection of interests and awareness of market participants and consumers of financial services in comparison with the functional and institutional models. The priority system of national regulation of the financial sector for the Ukrainian economy is determined.

scholarly journals A One Year Forecasting Project For Publicly Traded Companies

2011 ◽  
Vol 4 (9) ◽  
pp. 73
Author(s):  
Fred Petro
Keyword(s):  
Cash Flow ◽  
Team Member ◽  
Balance Sheet ◽  
Annual Reports ◽  
Publicly Traded ◽  
Accounts Receivable ◽  
Publicly Traded Companies ◽  
Income Statement ◽  
History Of ◽  
One Year

This project is intended to teach students to apply the material covered in their first graduate accounting course. This is accomplished by applying the material to an actual company selected by each team. The project is described as follows: The project includes a computerized spreadsheet preparation of a master budget forecast for an actual publicly traded company for one year into the future. . The dates depend upon when the annual reports are prepared for your company. The forecast begins the day following the last available published annual report. The forecast does not comprise any actual numbers regardless of when the actual annual or quarterly statements are prepared for the company selected. The actual balance sheet, income statement and statement of cash flow from the preceding year are included with the forecasted balance sheet, income statement and statement of cash flow. The company must have a physical inventory, and accounts receivable from sales. The company may not be one in which any team member(s) are employed. The forecast will include the following items:1. Introduction, including the history of the company and a description of the company plan and policies as given in the project2. Sales budget (twelve months).3. Schedule of purchases (twelve months).4. Schedule of collection of credit sales (accounts receivable) and cash sales (twelve months).5. Cash budget (twelve months).6. An Income statement (for the current year and the projected year).7. A Balance sheet (for the current year and the projected year).8. A Statement of cash flow (for the current year and the projected year).9. Cost-profit-volume analysis (twelve months).10. Conclusion and recommendations

International Terrorism and Human Rights

2014 ◽  
Vol 4 (1) ◽  
pp. 1-33
Author(s):  
Sundaresh MENON
Keyword(s):  
Human Rights ◽  
Political Violence ◽  
September 11 ◽  
International Terrorism ◽  
Positive Relation ◽  
Counter Terrorism ◽  
History Of ◽  
The Relationship

Following the attacks of September 11, 2001, a line was crossed in the history of terrorism and political violence—many things we had until then taken for granted were lost. This paper analyzes the relationship between international terrorism and human rights and examines how these two concepts—which some suggest are antithetical—might appropriately be spoken of in the same breath even in the aftermath of those terrible attacks. The overarching thesis is that counter-terror efforts must be approached in a way that endeavours to achieve a positive relation to, and co-existence with, the system of human rights at both international and national levels. In this connection, Singapore's approach to counter-terrorism will be considered, providing food for thought on how far it achieves a balance between security and liberty.

scholarly journals Weak Governance by Informed Active Shareholders

2020 ◽  
Author(s):  
Eitan Goldman ◽  
Wenyu Wang
Keyword(s):  
Firm Value ◽  
Corporate Decisions ◽  
Ex Post ◽  
Ex Ante ◽  
Generally True

Abstract Do informed shareholders who can influence corporate decisions improve governance? We demonstrate this may not be generally true in a model of takeovers. The model suggests that a shareholder’s ability to collect information and trade ex post may cause him, ex ante, to support pursuing value-destroying takeovers or oppose value-enhancing takeovers. Surprisingly, we find conditions under which giving the active shareholder greater influence weakens governance and reduces firm value, even if such influence power can be used to reject bad takeovers ex post. Our model sheds light on the limitations of relying on informed, active shareholders to improve governance.

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