Earnings Distribution Discontinuity from a Continuous Model of Earnings Management
by Andrew Yim
I formulate a tractable model of earnings management with benchmark beating and auditor-client interaction. Prior... more I formulate a tractable model of earnings management with benchmark beating and auditor-client interaction. Prior models have omitted one or both of these aspects. Under mild conditions, the optimal misreporting strategy is unique. A general characterization of the strategy is provided, with two (effectively four) closed-form solutions derived for certain combinations of the extended audit cost distribution and misreporting cost functions. Some of the solutions are expressed in terms of the Lambert W function, which has wide applications in many scientific fields. The shape of the function can lead to a “discontinuity” in earnings related distributions. Simulation results indicate that the model can accommodate the discontinuity phenomenon, as well as the volcano shape of the distributions of earnings change and earnings surprise, documented in the literature. The insights from the simulations can be summarized in two hypotheses, namely, the mixture conjecture and the continuous “discontinuity” conjecture. Maximum likelihood and nonlinear least squares methods can be used to estimate the model parameters. Several applications of the model are suggested, including the construction of an earnings manipulation measure distinct from but complementary to abnormal accruals.
Earnings management and contest to the control: An analysis of European family firms
This paper analyzes the influence of large shareholders on earnings management in family-owned firms using a sample of... more This paper analyzes the influence of large shareholders on earnings management in family-owned firms using a sample of firms from 9 European countries. We consider how the contest to the control of the largest shareholder and the existence of a controlling coalition in family-owned firms affect earnings management. We find that increased contestability of the control of the largest shareholder reduces earnings management in family-owned firms. Our results also show that in firms in which the largest shareholder is a family, a second or third family shareholder increases discretionary accruals.
Earnings management and debt ownership structure in Spanish firms
Co-authored with P. Saona. Published in Corporate Ownership and Control 5(1), 345-354.
The aim of this paper is to analyze the efficiency of debt ownership as a mechanism of corporate governance in... more The aim of this paper is to analyze the efficiency of debt ownership as a mechanism of corporate governance in reducing the discretionary behavior of managers. We use earnings management and discretionary accruals as indicators of managerial accounting discretion. Our results show that corporate debt has a prominent impact on reducing earnings management. Banking debt can foster the discretionary behavior of managers whereas public debt plays no relevant role. At the same time we test the complementary effect of some other mechanisms of corporate governance such as capital structure and ownership concentration.
Managers’ discretionary behaviour, earnings management and corporate governance: and empirical international analysis
Co-authored with P. Andrés and V. Palenzuela. Published in "Focus on Finance and Accounting Research". M. H. Neelan (Ed.). Nova Science Publishers, pág. 147-165.
In the present debate about corporate governance, boards of directors play a more and more relevant role. From this... more
In the present debate about corporate governance, boards of directors play a more and more relevant role. From this point of view, the board of directors becomes an important mechanism for monitoring managers’ discretionary behavior. Among the several ways for measuring discretionarity, we have focused on accrual decisions in order to manage earnings. This is precisely the main contribution of our paper: we have tested the ability of the board of directors for monitoring by using the discretionary component of earnings management as an indicator of managers’ discretionarity.
Using a sample of 450 non-financial companies from 10 OECD countries, we have found empirical evidence showing the link between some features of the board of directors and the discretionary manipulation of financial statements carried out by managers. Specifically, and as most of the literature has pointed, our main result stresses the positive and robust impact of board size on earnings management. As far as other characteristics of boards of directors are concerned, our research does not lend conclusive support to the effect of board composition or meeting frequency on earnings management.
Managers Discretionary Behaviour, Earnings Management and Internal Mechanisms of Corporate Governance: Empirical Evidence from Chilean Firms
Co-authored with Mauricio Jara. Published in "New developments in banking and finance". L. Corwnall (Ed.), Nova Science Publishers, pág. 159-178.
We analyze the impact of some internal control mechanisms -ownership structure, capital structure and growth... more We analyze the impact of some internal control mechanisms -ownership structure, capital structure and growth opportunities- on earnings management in Chilean firms throughout 1991-2001. Our results are interesting due to the specific characteristics of the corporate system in Chile where investor protection is weak and banks play a prominent role. We find that ownership concentration has a non-linear relation with earnings management, consistent with both the control of directors by main shareholders and the idea of expropriation of minority shareholders by large controlling shareholders. Financial leverage and public debt gives managers incentives to accounting discretion whereas bank debt plays an active role in corporate governance as a control mechanism. Our results also show that earnings are not managed to signal growth opportunities.
Earnings management and internal mechanism of corporate governance: Empirical evidence from Chilean firms
Co-authored with Paolo Saona. Published in Corporate Ownership and Control 3(1), 17-29
We analyze the ability of the capital structure and the ownership structure as mechanisms of control of the managers... more We analyze the ability of the capital structure and the ownership structure as mechanisms of control of the managers of the firms and to reduce their accounting discretionary power for a sample of Chilean firms. Using earnings management and abnormal accruals as indicators of discretionary behavior, our results show that both debt and ownership concentration reduce the managers’ discretionary behavior, so we corroborate the outstanding role both mechanisms play in a country with low protection of investors’ rights. At the same time, we find that earnings management is fostered by institutional investor ownership.
The impact of selected corporate governance variables in mitigating earnings management in the Philippines
The email that was embedded in this file was changed to mc_banderlipe@dlsu.ph. If you wish to collaborate with me in earnings management studies, or any other related studies, please let me know.
(Abstract from my MSc Accountancy Thesis)
Financial reporting seeks to communicate accounting... more
(Abstract from my MSc Accountancy Thesis)
Financial reporting seeks to communicate accounting information in assisting users to make relevant business decisions affecting the firm. The accounting information, normally presented in the form of financial statements, is the responsibility of the company's management, who are given the prerogative to exercise judgment in disclosing the information.
One of the ways that managers apply the use of prerogatives pertains to their discretionary reporting of a company's earnings. However, the abuse of discretionary exercises resulted to debacles that shocked the business world and thus, provided leeway to popularize the concept of earnings management. Numerous studies were conducted as to how this accounting phenomenon can be restrained using discretionary accruals as a recognized measure of earnings manipulation.
Given the increasing importance of corporate governance in the Philippines, this thesis attempts to explain the role of selected governance variables related to a company's board of directors in mitigating earnings management in the country. Using the financial statements of publicly listed companies and a modification of an extant discretionary accruals measurement model, the findings revealed that the holding of multiple directorial positions by the independent directors, and the managerial ownership of the board and key management personnel are the significant factors that can limit the incentives to manage earnings in the Philippines. Moreover, firm size and return on assets were identified to have explanatory significance on earnings management among the control variables used.
Further studies recommend examining the restraining power of governance variables from other disclosures, studying any incidence of earnings manipulation that may emanate from the pre- and post- occurrence of certain events, and using other control variables that can mitigate the existence of an information asymmetry environment that leads to earnings management in the country.
Download (.pdf)