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Article
Publication date: 1 June 1998

Florence R. Kirk, Gerald J. Lobo and Stephen R. Fritsche

Outlines previous research on the relationship between stock returns and earnings and investigates the effects of divergence between security analysts’ earnings forecasts on this…

260

Abstract

Outlines previous research on the relationship between stock returns and earnings and investigates the effects of divergence between security analysts’ earnings forecasts on this relationship. Uses cross‐sectional analysis, time series and variable parameter models on 1981‐88 US data to see whether the stock returns‐earnings coefficient decreases with increased disagreement between analysts and shows that it does. Considers the implications for policy makers and accounting research design; and consistency with other research.

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Managerial Finance, vol. 24 no. 6
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 2 May 2017

Wenxia Ge, Tony Kang, Gerald J. Lobo and Byron Y. Song

The purpose of this paper is to examine how a firm’s investment behavior relates to its subsequent bank loan contracting.

1257

Abstract

Purpose

The purpose of this paper is to examine how a firm’s investment behavior relates to its subsequent bank loan contracting.

Design/methodology/approach

Using a sample of US firms during the period 1992-2011, the authors examine the association between overinvestment (underinvestment) and three characteristics of bank loan contracts: loan spread, collateral requirement, and loan maturity.

Findings

The authors find that overinvesting firms obtain loans with higher loan spreads. Additional tests show that the effect of overinvestment on loan spreads is generally more pronounced in firms with lower reputation, weaker shareholder rights, and lower institutional ownership. The effect of overinvestment on collateral requirement is mixed, and investment efficiency has no significant relation to loan maturity.

Research limitations/implications

The results are subject to the following caveats. First, while the study provides empirical evidence that investment efficiency affects bank loan contracting terms, especially the cost of bank loans, the underlying theory is not well-developed. The authors leave it up to future research to provide a theoretical framework to clearly distinguish the cash flow and credit risk effects of past investment behavior from those of existing agency conflicts. Second, due to data limitation, the sample size is small, especially when the authors control for corporate governance measured by G-index and institutional ownership.

Practical implications

The finding that overinvestment is costly to corporations suggests that managers should consider the potential trade-offs from such investment decisions carefully. The evidence also alerts shareholders and board members to the importance of monitoring management investment decisions. In addition, the authors find that corporate governance moderates the relationship between investment decisions and cost of bank loans, suggesting that it would be beneficial to design effective governance mechanisms to prevent management from empire building and motivate managers to pursue efficient investment strategies.

Originality/value

First, the findings enhance understanding of the potential economic consequences of overinvestment decisions in the context of a firm’s private debt contracting. The evidence suggests that lenders perceive higher credit risk from overinvestment than from underinvestment, likely because firms squander cash in the current period by investing in (negative net present value) projects that are likely to result in future cash flow problems. Second, the study contributes to the literature on the determinants of bank loans by identifying an observable empirical proxy for uncertainty in future cash flows that increases credit risk.

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Asian Review of Accounting, vol. 25 no. 2
Type: Research Article
ISSN: 1321-7348

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Article
Publication date: 1 January 2004

Kiridaran Kanagaretnam, Gerald J. Lobo and Robert Mathieu

Prior research demonstrates that share prices reflect a risk premium that is associated with earnings variability. This suggests that managers can reduce the cost of capital and…

1514

Abstract

Prior research demonstrates that share prices reflect a risk premium that is associated with earnings variability. This suggests that managers can reduce the cost of capital and increase share prices by reducing earnings variability. In this study, we investigate bank managers' use of discretion in estimating loan loss provisions (LLP) to reduce earnings variability. We find that banks with relatively high pre‐managed earnings have positive discretionary LLP and banks with relatively low pre‐managed earnings have negative discretionary LLP, results that are consistent with the hypothesis of earnings management to reduce earnings variability. In addition, we find that bank managers' decisions to reduce earnings variability are related to the need for external financing and to gains and losses on the sale of securities which serve as substitutes for accomplishing their objective of earnings variability reduction.

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Review of Accounting and Finance, vol. 3 no. 1
Type: Research Article
ISSN: 1475-7702

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Book part
Publication date: 9 October 2020

Chen Liu and Serena Shuo Wu

Abstract

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Corporate Fraud Exposed
Type: Book
ISBN: 978-1-78973-418-8

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Article
Publication date: 23 March 2010

Sudheer Chava, C.S. Agnes Cheng, Henry Huang and Gerald J. Lobo

The purpose of this paper is to investigate the effects of class action litigation on firms' cost of equity capital.

1182

Abstract

Purpose

The purpose of this paper is to investigate the effects of class action litigation on firms' cost of equity capital.

Design/methodology/approach

The paper uses three different models to estimate the cost of equity capital. To separate the impact of lawsuit filings on the cost of equity capital from that of the revelation event, a sample of lawsuits with a long lag between the disclosure events and filing dates was analyzed. Also, a comparison group study was conducted to illustrate the distinct impact of a lawsuit filing on the defendant firm's cost of equity capital. Finally, a multivariate analysis was used to examine the factors that affect the magnitude of such impact.

Findings

The paper finds that filing of a class action lawsuit results in a significant increase in the defendant firm's cost of equity capital incremental to the effect of the disclosure event. Additionally, increases in the cost of equity capital after the lawsuit filings are higher when the lawsuits involve generally accepted accounting principle (GAAP) violation and have high merit, and when the defendant firms are small and have high leverage.

Practical implications

Findings in this paper suggest that the filing of a lawsuit brings new information to the market and is likely to increase the defendant firm's cost of equity capital by increasing the perceived risk in corporate governance, information asymmetry and operation.

Originality/value

This paper reveals securities class actions increase the defendant firms' cost of equity capital.

Details

International Journal of Law and Management, vol. 52 no. 2
Type: Research Article
ISSN: 1754-243X

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Article
Publication date: 9 October 2023

Manish Bansal

This paper undertakes an extensive and systematic review of the literature on earnings management (EM) over the past three decades (1992–2022). Furthermore, the study identifies…

2010

Abstract

Purpose

This paper undertakes an extensive and systematic review of the literature on earnings management (EM) over the past three decades (1992–2022). Furthermore, the study identifies emerging research themes and proposes future avenues for further investigation in the realm of EM.

Design/methodology/approach

For this study, a comprehensive collection of 2,775 articles on EM published between 1992 and 2022 was extracted from the Scopus database. The author employed various tools, including Microsoft Excel, R studio, Gephi and visualization of similarities viewer, to conduct bibliometric, content, thematic and cluster analyses. Additionally, the study examined the literature across three distinct periods: prior to the enactment of the Sarbanes-Oxley Act (1992–2001), subsequent to the implementation of the Sarbanes-Oxley Act (2002–2012), and after the adoption of International Financial Reporting Standards (2013–2022) to draw more inferences and insights on EM research.

Findings

The study identifies three major themes, namely the operationalization of EM constructs, the trade-off between EM tools (accrual EM, real EM and classification shifting) and the role of corporate governance in mitigating EM in emerging markets. Existing literature in these areas presents mixed and inconclusive findings, suggesting the need for further theoretical development. Further, the study findings observe a shift in research focus over time: initially, understanding manipulation techniques, then evaluating regulatory measures, and more recently, investigating the impact of global accounting standards. Several emerging research themes (technology advancements, cross-cultural and cross-national studies, sustainability, behavioral aspects and non-financial indicators of EM) have been identified. This study subsequent analysis reveals an evolving EM landscape, with researchers from disciplines like data science, computer science and engineering applying their analytical expertise to detect EM anomalies. Furthermore, this study offers significant insights into sophisticated EM techniques such as neural networks, machine learning techniques and hidden Markov models, among others, as well as relevant theories including dynamic capabilities theory, learning curve theory, psychological contract theory and normative institutional theory. These techniques and theories demonstrate the need for further advancement in the field of EM. Lastly, the findings shed light on prominent EM journals, authors and countries.

Originality/value

This study conducts quantitative bibliometric and thematic analyses of the existing literature on EM while identifying areas that require further development to advance EM research.

Details

Journal of Accounting Literature, vol. 46 no. 4
Type: Research Article
ISSN: 0737-4607

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Article
Publication date: 23 August 2022

Jaime Fernandes Teixeira and Lúcia Lima Rodrigues

The purpose of this paper is to present a bibliometric analysis of earnings management (EM), providing an overview of the main results and research trends in this area. EM is a…

1188

Abstract

Purpose

The purpose of this paper is to present a bibliometric analysis of earnings management (EM), providing an overview of the main results and research trends in this area. EM is a relevant topic in financial studies. It has been widely studied over the past few decades as a phenomenon of intentional manipulation of financial reporting.

Design/methodology/approach

The Web of Science (WoS) database was used as a source, and this study has adopted VOSviewer as the bibliometric analysis tool to achieve an overview of EM research and understand current research trends on this matter. This study has collected data from 4,342 articles published from 1900 to 2020.

Findings

The conclusions of this study show that EM is strongly related to corporate governance, performance and quality of information. Publication trends and categories are useful to understand the development of trends and current domains in this area. This research analyses the most productive authors, countries and journals. This study conducted a cluster analysis using a keyword perspective to obtain emerging trends in EM. Research in EM through real activities represents a research gap, which can be an opportunity for future research.

Research limitations/implications

The authors recognize as limitations the fact that the study is limited to the WoS database. Another limitation is the keywords used for the search, as this study only uses “earnings management”, as it is the most used keyword in EM literature. An additional limitation is associated with the selection of only one type of document, “articles,” disregarding other types of publications.

Originality/value

Although there are some bibliometric studies on EM, this study found out that they focus on specific EM topics and fail to analyze this theme on a global scale. Most of the literature on this subject is disperse and consequently needs systematization. This research is also relevant for academic purpose, as this research contributes to understanding the state of art and contributes to the development of scientific knowledge by providing a systematization of the literature on the topic of EM.

Details

International Journal of Accounting & Information Management, vol. 30 no. 5
Type: Research Article
ISSN: 1834-7649

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Article
Publication date: 1 March 2002

Ahmed Riahi‐Belkaoui

Refers to previous research on the firm characteristics which affect the relationship between unexpected returns and unexpected earnings to suggest that multinationality may proxy…

407

Abstract

Refers to previous research on the firm characteristics which affect the relationship between unexpected returns and unexpected earnings to suggest that multinationality may proxy for all of them. Develops mathematical models to investigate the effect of multinationality and applies them to 1995‐1999 US data on multinational firms. Describes the methodology and presents the results, which suggest that firms with relatively more multinationality have smaller, less significant earnings response coefficients and vice versa. Concludes that multinationality is a good proxy for firm size, quality of preannouncement information, earnings predictability etc.

Details

Managerial Finance, vol. 28 no. 3
Type: Research Article
ISSN: 0307-4358

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Abstract

Details

Corporate Fraud Exposed
Type: Book
ISBN: 978-1-78973-418-8

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Article
Publication date: 1 February 2003

Ahmed Riahi‐Belkaoui

Fudenberg and Tirole (1995) argue that concern about job security creates an incentive for managers to smooth earnings. Consistent with their model, Defond and Park (1997) show…

179

Abstract

Fudenberg and Tirole (1995) argue that concern about job security creates an incentive for managers to smooth earnings. Consistent with their model, Defond and Park (1997) show that managers smooth earnings in consideration of both current and future relative performance. To provide a more direct evidence of anticipating smoothing and job security, we hypothesize that the extent of income smoothing will vary with managers' job security concerns as proxied by the level of the investment opportunity set or growth opportunities. Our results confirmed our predictions.

Details

Review of Accounting and Finance, vol. 2 no. 2
Type: Research Article
ISSN: 1475-7702

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