Abnormal disclosure tone, earnings management and earnings quality

PurposeThe authors investigate whether abnormal tone in corporate narrative disclosures is associated with earnings management and earnings quality, in an emerging market context. Based on agency theory and opportunistic/impression management perspective, this study examines whether executives manage disclosure tone to support their opportunistic behavior, when using earnings management.Design/methodology/approachThis study uses a sample of earnings press releases of publicly traded firms in the MENA region during 2014–2019. It employs textual analysis to measure disclosure tone. The authors estimate abnormal disclosure tone after controlling for firm characteristics. Discretionary accruals proxy for earnings management and are estimated using Modified Jones model. Earnings quality is measured using accounting-based and market-based proxies: earnings smoothness, persistence, predictability and value relevance/informativeness.FindingsResults show a positive association between abnormal disclosure tone and earnings management. Additionally, results show that earnings persistence is higher for firms with lower levels of abnormal disclosure tone. Results are sustained for earnings smoothness, but not for predictability and value relevance/informativeness.Research limitations/implicationsResults provide initial evidence of management's use of tone management jointly with earnings management. This adds to prior studies adopting the opportunistic perspective of disclosure tone, through showing that discretionary tone in narrative disclosures can be strategically used by management to influence investors' perceptions.Practical implicationsThe results provide valuable insight to board of directors, auditors and market participants on the possible biases emerging from tone of narrative disclosures in corporate reports. For regulators and standard-setters, results shed light on the need for regulations and rules beyond financial statements, to guide disclosure of narrative information in different corporate reports.Originality/valueThis study contributes to the rare evidence that investigates textual disclosure characteristics to uncover management's opportunistic practices and assess earnings quality. Where majority of studies concentrate on developed markets, this study provides novel evidence of emerging markets by examining the association between abnormal disclosure tone and earnings management/earnings quality. Also, it validates the tone management model proposed by Huang et al. (2014) for capturing tone manipulation.

Family firm and analyst forecasts in an emerging economy

Purpose The purpose of this paper is to examine how family firms affect analyst forecast dispersion, accuracy and optimism and how earnings smoothness as the moderating factor, affects these relationships in an emerging market context. Design/methodology/approach This paper uses the population sample of firms listed on the Taiwan Stock Exchange from 2009 to 2010 as the research sample, which includes 963 firm-year observations. Findings The findings show that analysts following family firms are more likely to have more dispersed, less accurate and more optimism biased forecasts than those following nonfamily firms. Earning smoothness is mainly used by nonfamily firms as a signaling strategy to improve analyst forecast quality. In contrast, earnings smoothness is mainly used by families as a garbling strategy, stimulating forecast optimism. Only earnings smoothness in family firms with a high level of family ownership concentration is likely to be signaling-oriented to improve analyst forecast accuracy and mitigate analyst optimism biases. Originality/value Emerging markets are not only featured by prevailing principal-principal conflicts but also have multiple levels of agency conflicts among large shareholders, minority shareholders and professionally hired managers. This research reveals the multiple governance roles of family owners in affecting analyst forecast quality, including their entrenchment role in extracting private benefits of control through opaque environments and market discipline distortion role in aligning interests between managers and families without prioritizing meeting or beating analyst forecasts, both at the cost of minority shareholders. This research further disentangles the intertwined signaling oriented and garbiling oriented incentives associated with earnings smoothness under family governance.

Do Creditors Prefer Smooth Earnings? Evidence from European Private Firms

ABSTRACT We investigate the interplay between creditor financing and the smoothness of earnings reported by European private firms, and document how heterogeneous debt-contracting infrastructures across Europe moderate this relation. We expect the smoothness of earnings to be positively related to the relative importance of credit providers in our setting. More importantly, we predict this relation to be more pronounced in regimes with higher bankruptcy and contract enforcement costs. Finally, we hypothesize that earnings smoothness is negatively related to the cost of debt of our sample firms. Our large-sample empirical evidence confirms our expectations. While the cross-sectional nature of our setting limits our potential to address endogeneity concerns and, thus, caution is required when interpreting our findings in a causal way, they are consistent with the accounting of European private firms being shaped by creditor incentives and with this link being moderated by the country-level efficiency of the debt-contracting infrastructure. JEL Classifications: M41; G14; F42. Data Availability: All data used in this study are publicly available from the sources identified in the text.

Earnings management and the effect of earnings quality in relation to stress level and bankruptcy level of Chinese listed firms

This paper investigates the link between earnings management and earnings quality for the Chinese firms listed in the Shanghai and Shenzhen stock exchanges from 2003 to 2007. The earnings quality is measured by four separate earnings attributes: accruals quality, earnings persistence, earnings predictability, and earnings smoothness. We find that the stressed/bankrupt firms prefer opportunistic earnings management; the non-stressed/non-bankrupt firms are more likely to choose more efficient earnings management than the stressed/non-bankrupt firms. We find that earnings management performs better than earnings quality in predicting future profitability. We also find that the earnings quality has deteriorated over the sample period; the number of stressed/bankrupt firms increased and the number of non-stressed/non-bankrupt firms decreased.