Kenneth J. Hunsader and Gwendolyn Pennywell
Conventional wisdom implies that firms manage earnings to maximize the wealth of the manager, the value of the firm and/or the amount of information in the market. The purpose of…
Abstract
Purpose
Conventional wisdom implies that firms manage earnings to maximize the wealth of the manager, the value of the firm and/or the amount of information in the market. The purpose of this paper is to offer an additional explanation.
Design/methodology/approach
Using companies from the Standard & Poor's 500 index and an annual report disclosure ranking, the authors employ a standard t‐test of means across groups to check for differences in disclosure based on a competitive strategy measure (CSM). The CSM classifies industry rivals into strategic complements or substitutes. The authors also test for differences in earnings management using discretionary accruals and using event study methodology examine how stock returns respond to the Sarbanes‐Oxley Act.
Findings
The authors show that earnings management is a tool used by firms based on the level of competitive strategy within the industry. It was found that firms competing as strategic substitutes are more likely to actively engage in earnings management through discretionary accruals when the informational environment permits. It was also found that substitute firms suffer greater negative wealth effects than complement firms in response to the Sarbanes‐Oxley Act.
Originality/value
This is one of the first empirical articles to examine how competitive strategy affects earnings management and the stock market response to the Sarbanes‐Oxley Act of 2002.
Details
Keywords
Kenneth Hunsader, Natalya Delcoure and Gwendolyn Pennywell
– The purpose of this paper is to investigate the effect of bankruptcy announcements on the bankrupt firm's competitors' stock returns.
Abstract
Purpose
The purpose of this paper is to investigate the effect of bankruptcy announcements on the bankrupt firm's competitors' stock returns.
Design/methodology/approach
Starting with a sample of Chapter 11 bankruptcies from 1980 through 2008, the authors use event study methodology to examine the returns of bankrupt firm's rivals around the filing date. The authors employ a t-test of means across groups to check for differences in returns based on a competitive strategy measure (CSM). The CSM classifies industry rivals into strategic complements or substitutes. The authors also separate the sample based on traditional or non-traditional bankruptcies and conduct explanatory regressions on the abnormal returns using economically important independent variables such as the CSM, leverage and the Herfindahl index.
Findings
Similar to previous research, the paper finds that less concentrated industries and industries with high leverage suffer greater negative wealth effects when a firm within the industry announces a bankruptcy. Extending current research, the paper finds strategic interaction within the industry is an important factor in determining industry portfolio returns. Rivals characterized as strategic complements exhibit significant negative valuation effects while rivals characterized as strategic substitutes do not. Finally, the paper finds that this strategic effect is dominant when the future cash flows and outcome of the reorganization is more uncertain as substantiated by the difference between traditional and non-traditional bankruptcy filings.
Originality/value
This is believed to be the first empirical article to examine how the CSM affects the returns of bankrupt firms' rivals.