Determinants of the Readability and Comprehensibility of Risk Disclosures

The chapter intends to determine if managers make use of impression management strategies to hide or obfuscate risk disclosures through the analyses of the risk information disclosed by Portuguese non-financial listed companies. A content analysis of the management reports, notes to the financial statements, and corporate governance reports of companies listed at Euronext Lisbon, in the years 2007, 2010, and 2013 was carried out. Findings indicate that the understandability of the risk information is positively associated with the company's size. Results also indicate that there is a negative association between the readability of risk information disclosed and the company's size and industry.

Earnings Management and Corporate Governance in Family Firms

Earnings management and corporate governance relationships are examined for a sample of 49 Portuguese listed firms considering an unbalanced panel for the period 2002-2017, using panel corrected standard errors models and considering the family ownership effect. Empirical findings reveal that there is a positive relationship between corporate board independence and earnings management and that the presence of women on board decreases earnings management practices. Results are consistent with the hypothesis that earnings management practices are lower in family firms than in non-family firms. Size, being audited by the Big 4 companies, return on assets, loss, and the existence of an audit committee on board influence positively earnings management, but leverage, age, and ownership control are negatively related to earnings management. Results indicate that further auditing and control is necessary for Portuguese listed companies leading to strict recommendations to be followed by policymakers regarding control of these firms.

An Overall Perspective of Income Smoothing as a Strategy of Earnings Management

This chapter provides insights on earnings management (EM) explanatory factors. These factors are analyzed within the framework of a specific strategy of EM: income smoothing (IS). This strategy is often used to report earnings with an artificially reduced variability. Thereby, the purpose of the chapter is to explore the motivations, the determinants (anticipated by the positive accounting theory), and some firm-specific factors that might explain IS practices. The relevance of this chapter is justified essentially by two reasons. First, it highlights the contemporary importance of this research line. The academic community, professionals, and regulatory bodies have expressed publicly the concern about the quality of financial reporting. Consequently, a deep knowledge of the factors that possibly explain these accounting discretionary practices is crucial. Second, the extensive literature on EM also justifies this chapter. Thereby, the systematization of the literature on the IS explanatory factors can help researchers and increase future empirical research focused on this area.

Earnings Management and Stock Market Reaction

This chapter aims to analyze if and the extent to which earnings management activities are detected by market participants. For that purpose, this chapter reviews prior literature on stock market reaction to earnings management and earnings quality. A main conclusion obtained with this approach is that stock market participants are to some extent misled by earnings management activities consistent with those activities making the firm's information environment more opaque, thus increasing the difficulty for investors to interpret financial statements. Both the theoretical and empirical contributions provided in such works are relevant given the potential negative consequences of earnings management for stakeholders, firms, and even for the entire economy. In addition, it must be emphasized that accounting regulation is fundamental to balance the trade-off between more informative financial statements and reducing the level of managers' opportunistic choices.

Earnings Management in SMEs

Although small and medium-sized enterprises (SMEs) are represented on a large scale around the world, the literature on earnings management (EM) has focused mainly on listed firms. In this sense, this chapter provides important insights on the determinants and main incentives for EM in the context of Portuguese and Spanish SMEs, over a period of 10 years, also considering two relevant macroeconomic events (financial crisis and entry into force of harmonized accounting regulations). The results obtained are similar for both countries and are intended to underline the possible positive effects of reducing these practices after the entry into force of a harmonized accounting standard with the International Accounting Standards Board (IASB) standards and also to warn against the possible negative effects of managers' opportunistic behavior during a period of financial crisis. The close association between accounting and taxation, since the calculation of the tax income depends partly on the accounting income, remains an incentive to engage in EM practices.

Developments in Earnings Management Practices in the IFRS Perspective

Financial statements are an important tool when it comes to determining the level of success of a company's management and setting its market value. Nevertheless, company managers may sometimes try to reflect the company's financial results differently. Strategic methods, used by the company to deliberately change the earnings they gain by using the flexibility provided by the accounting system, are called earnings management practices. This chapter examines the examples of a public company that is traded on the Istanbul Stock Exchange for the purpose of determining earnings management practices under International Financial Reporting Standards (IFRS). Given the results of the study, it is possible to say from the earnings management practices that the company only benefited from those in the legal framework.

Impression Management Strategies in the Chairmen's Statements

This chapter assesses the influence of organizational performance in the adoption of impression management strategies in the Chairmen's statements of the Portuguese financial companies. It also evaluates the impact of the financial crisis on the adoption of impression management strategies. To this end, and using the content analysis of the Chairmen's statements included in the individual annual reports for 2006-2012 of 27 financial institutions, the authors conclude that even throughout the financial crisis period, Portuguese financial companies did not tend to adopt more impression management strategies. However, they have seen that in some years there is some evidence of its adoption.

The Relationship Between the Quality of Financial Information in Industrial Companies and Discretionary Inventory Management

Inventories are the base element for the manufacturing (industrial) companies. The inclusion of discretionary in the inventory management processes of production leads to changes in the value of the companies. The accounting system produces information used in predictions and for management decision. The usefulness and opportunity of information are considered indispensable. If managers use their discretionarily, in the accounting system and in real activities, to achieve the firm value and earnings forecast, they will influence and modify the financial information quality. Ferrer and Ferrer said that a simple decision can enrich one company from one moment to another, and a small accounting change allows a great loss of results. The question arises: Do managers use their discretionarily and modify the financial information quality? Using adjusted models to capture discretionary accounting management and real activity management, it is possible to conclude that there is a strong evidence of discretionary management of the inventory in manufacturing Portuguese SME.

Convergence of Accounting Standards to International Standards and Earnings Management in Brazilian Companies

This chapter sought to highlight the main challenges of the initial adoption of accounting standards converged to international standards applied to public companies and treasury-dependent companies and how the results of economic agents in public and private companies in Brazil are managed. Relevant legislation, norms, pronouncements, interpretations, and guidelines of competent bodies were analyzed through bibliographical and documentary research. The results demonstrated that between the two processes of accounting convergence to which such entities must submit, there are conflicts of terms and technical accounting procedures to assist these entities to the process of accounting convergence. Regarding earnings management, it was found that there is an earnings management in both sectors; however, the public sector reaches a high number of citizens, while the private sector is limited to stakeholders; however, both sectors, in some cases, multiplicity of components of the public sector, resembles the private sector.

The Use of Financial Graphics as an Impression Management Tool

The main objective of this chapter is to determine the graph discrepancy index and to analyze which factors can actually influence the graphical discrepancy index, based on the strategies of impression management. For this particular purpose, a content analysis of management and financial reports was made, from 2010 to 2015, of Portuguese companies with securities admitted to trading in Euronext Lisbon. Findings indicate that companies tend to engage in printing management practices, but it was not possible to identify the determinants of such practices since all the hypotheses were rejected.