Stock liquidity and corporate tax avoidance

We show that firms with higher stock liquidity engage less in extreme (i.e., overly aggressive or overly conservative) tax avoidance. The effect of stock liquidity on tax avoidance is economically meaningful and robust across alternative measures of tax avoidance and stock liquidity. The findings also hold after controlling for potential endogenous effects. We further document that the effect of stock liquidity on tax avoidance is amplified for firms with high proportions of activist shareholders and attenuated for firms with high levels of stock price informativeness. Overall, our findings suggest that stock liquidity mitigates extreme tax avoidance by enhancing shareholders’ monitoring over firm management.

     

Examining the relationship between earning management and market liquidity

The main purpose of this paper is to argue the extent that earnings management lowers liquidity. It should increase information asymmetry and impair trading liquidity. Using a sample of French firms from 2008 to 2011, we find that firms that manage earnings have wider bid-ask spreads. Our results are robust for both of two well-established measures of market liquidity. Therefore, the empirical results indicate that firms that exhibit greater earnings management are associated with lower market liquidity. These findings are in line with adverse selection and shed light on the role corporate governance devices can play in the consideration of shareholder interest’s protection, which leads to improved stock market liquidity levels.     

Gauging the effects of stock liquidity on earnings management: Evidence from the SEC tick size pilot test

This paper studies whether stock market liquidity has a causal effect on real earnings management. We introduce a new and cleaner identification of liquidity shock - the 2016 Tick Size Pilot Program - to show that firms with less liquid stocks are more likely to engage in real earnings management. We provide direct evidence that stock liquidity helps to deter real earnings management via enhancing governance by long-term institutional investors through trading and direct intervention, and via facilitating short selling to discipline managers. The effect is stronger in firms that do not pay dividends.     

Does the cessation of quarterly earnings guidance reduce investors’ short-termism?

The practice of providing quarterly earnings guidance has been criticized for encouraging investors to fixate on short-term earnings and encouraging managerial myopia. Using data from the post–Regulation Fair Disclosure period, we examine whether the cessation of quarterly earnings guidance reduces short-termism among investors. We show that, after guidance cessation, investors in firms that stop quarterly guidance are composed of a larger (smaller) proportion of long-term (short-term) institutions, put more (less) weight on long-term (short-term) earnings in firm valuation, become more (less) sensitive to analysts’ long-term (short-term) earning forecast revisions, and are less likely to dismiss chief executive officers for missing quarterly earnings targets by small amounts, relative to investors in firms that continue to issue quarterly earnings guidance. Our study provides new evidence of the benefit of stopping quarterly earnings guidance, that is, the reduction of short-termism among investors.     

Another victory of retail investors: Social media's monitoring role on firms' earnings management

Stock forums are expected to complement individual investors' sophistication via collective wisdom, thus triggering extreme market reactions through uniform scattered opinions. This paper investigates whether stock forums improve corporate governance and decrease earnings management among firms. We found that increased posts, views and comments in a stock forum raise firms' potential costs for obfuscating corporate performance and constrain their upward earnings management. Stock forum discussion tends to increase the likelihood of and the penalties for earnings management detection. By decomposing the cost of earnings management into tangible and regulatory costs, we find that the stock forum governance effect is more pronounced in firms with higher managerial ownership and higher regulatory risk. Social media is a complement and intensifier of traditional mass media. Firms with broader media coverage are more sensitive to the stock forum governance effect. Our results are robust after considering the likelihood that executives will account for stock forum discussion in their reporting decisions.     

Hedging and earnings management in the light of IFRS implementation: Evidence from the UK stock market

This study examines the association between IFRS implementation, hedging and earnings management. It identifies the financial attributes of firms that utilise hedging and explores the IFRS transition process for hedgers and non-hedgers. This study also investigates the effects of a firm’s decision to use hedging or earnings management on firm value. The findings show that the transition to IFRSs has affected the equity, earnings, leverage and liquidity of hedgers in a significantly positive manner as opposed to non-hedgers, who presented a generally significant negative change in their respective figures. Hedgers tend to be larger sized and exhibit higher profitability, growth, leverage and liquidity. Hedgers also tend to have foreign revenues, be cross-listed in foreign stock markets and audited by a Big 4 auditor. This study reports that hedging and earnings management display an inverse relation. Firm value is found to be positively related to hedging and negatively related to discretionary accruals and managerial opportunism. Effective corporate governance mechanisms are found to display a negative association with discretionary accruals and a positive relation with firm value.     

Does top executive gender diversity affect earnings quality? A large sample analysis of Chinese listed firms

Using a large sample of Chinese listed firms, this paper examines whether the gender of top executives affects earnings quality. Unlike the findings documented in developed markets such as the U.S., our results show that earnings quality proxies, including earnings persistence, the accuracy of current earnings in forecasting future cash flows, the association between earnings and stock returns, and the absolute magnitude of discretionary accruals do not display significant differences for firms with female and male top executives. This study is the first to examine the relationship between gender and earnings quality in emerging markets such as China that offers managerial and policy implications.     

Real Earnings Management,Liquidity Risk and REITs SEO Dynamics

We analyze how REITs managers use real earnin gs management to address issues of liquidity risk and increased cost of capital they face during seasoned equity offerings. We show that REITs managers engage in real earnings management instead of accrual earnings management to attract more uninformed trading in order to provide the liquidity service at a lower cost during seasoned equity offerings. We find REITs with higher liquidity risk are more likely to manipulate earnings prior to equity offerings and uninformed trading is higher following real earnings management. Firms set the offer price at a smaller discount after engaging in real earnings management and stock returns decline in the long run. The findings are consistent with real option and liquidity risk explanations for equity offerings.     

Does religiosity enhance the quality of management earnings forecasts?

This study investigates whether firms located in areas with higher levels of religiosity disclose higher-quality management earnings forecasts than do other firms. Using a US sample of 4,655 firm-year observations over the period 2001 to 2014, we find that firms headquartered in counties with higher proportions of religious adherents issue earnings forecasts that are less optimistically biased and that the effect of religiosity is concentrated in firms with weak monitoring mechanisms. We also find that religiosity mitigates pessimistic bias in management earnings forecasts, but only for those issued by firms operating in low litigation industries. This result suggests that when the litigation risk is high, both ethicality and risk aversion are at work and their competing effects likely offset each other. Additionally, we document that forecasts issued by firms in more religious areas trigger stronger stock price reactions than those issued by other firms and that the effect is limited to forecasts containing optimistic bias. Overall, our results show that religiosity enhances the quality of management earnings forecasts, but the effect varies based on different conditions.     

Effect of disclosure regulation on earnings management through related-party transactions: Evidence from Taiwanese firms operating in China

This study examines the effect of disclosure regulation on earnings management using Taiwanese companies conducting transactions with China as the institutional setting. Measuring earnings management by the amount of discretionary accruals (DACCs), the study shows that disclosure regulation mitigates DACCs of Taiwanese firms engaging in related-party transactions with Chinese entities. Following enactment of the disclosure regulation in November 2000, DACCs among Taiwanese enterprises conducting transactions via offshore affiliates dropped. While the disclosure regulation helps to reduce earnings management, this study reports that such effect is asymmetric between high-tech firms and non–high-tech firms. Specifically, the disclosure regulation is effective in reducing earnings management among firms in non–high-tech sectors. However, such effect is not significant among firms in high-tech sectors. This study discusses the implications of empirical findings for corporate management, regulatory agencies, and firm stakeholders.     

Takeover protection and managerial myopia: Evidence from real earnings management

We examine whether takeover protection exacerbates or mitigates real earnings management (i.e., using abnormal real activities to meet near-term earnings targets). Consistent with Stein’s (1988) prediction that takeover pressure induces managerial myopia, we find that less-protected firms are associated with higher levels of real earnings management. We further disentangle the value-destroying and signaling effects of real earnings management by finding that although abnormal real activities in general are associated with lower future performance, abnormal real activities intended to just meet earnings targets are associated with higher future performance, consistent with real earnings management conveying a signal of superior future performance in addition to a general value-destroying effect. Taken together, our evidence suggests that takeover protection reduces managers’ pressure to resort to real earnings management as a costly means of signaling better future performance.     

Information content of credit ratings in pricing of future earnings

This paper examines whether credit ratings convey information about the firm’s future earnings to the capital markets. Using the future earnings response coefficient methodology, we find that the current stock returns of rated firms reflect more future earnings than do the stock returns of non-rated firms. We also find that the market reflect more future earnings in current returns for higher-rated firms. In addition, we present evidence that returns impound future earnings to a greater extent after a ratings initiation or upgrade. We empirically eliminate the possibility that our findings are driven by earnings smoothing, market liquidity or omitted default risk factors associated with ratings. Our results are robust to controlling for potential omitted variables, endogeneity bias, loss versus profit firms, and serial correlation of error terms. Overall, the evidence suggests that credit ratings help disseminate private information to reduce information uncertainty about the firm’s future profitability among market participants.     

Institutional ownership stability and real earnings management

We examine the relationship between institutional ownership stability and real earnings management. Our findings indicate that firms held by more stable institutional owners experience lower real activities manipulation by limiting overproduction. We further examine how the stability in the shareholdings of pressure-sensitive and insensitive institutional investors affect target firms’ use of real earnings management, respectively. Unlike pressure-sensitive institutional investors, the stability in the share ownership of pressure-insensitive institutional investors (i.e., investment advisors, pension funds and endowments) mitigates target firms’ use of real earnings management. Overall, our results are consistent with the view that institutional investors presence acts as a monitor on target firms’ use of real earnings manipulation activities.     

Stockpiling cash when it takes time to build: Exploring price differentials in a commodity boom

Some projects take time to build or are slow to yield cash flows. This may impact the dynamics of investment and liquidity management, although few studies test their financial implications. We exploit the peculiar advantages of copper mines as a laboratory to identify cash-flow sensitivities. In this context, investment decisions depend on the expectations of the long run price of the commodity, while the spread between the spot price and this long run expectations shifts current cash-flows. For this study we compiled a sample of copper firms between 2002 and 2012. We do not find significant effects of cash flow on current capital expenditures, but we do observe a systematic cash flow sensitivity of cash holdings, meaning that some of these transitory earnings are retained as liquidity. This cash stockpiling is stronger among financially constrained firms. In a context of time-to-build, our findings support financial theories emphasizing the salience of cash as buffer stock for liquidity in preparation for future investment opportunities.     

Short-term earnings guidance and accrual-based earnings management

Motivated by recent practitioners’ concerns that short-term earnings guidance leads to managerial myopia, we investigate the impact of short-term earnings guidance on earnings management. Using a propensity-score matched control sample, we find strong and consistent evidence that the issuance of short-term quarterly earnings guidance is associated with less, rather than more, earnings management. We also find that regular guiders exhibit less earnings management than do less regular guiders. Our findings hold using both abnormal accruals and discretionary revenues to measure earnings management and after controlling for potential reverse causality concerns. Furthermore, in a setting where managers have particularly strong capital market incentives to manage earnings, we corroborate these findings by documenting that earnings guidance either has no impact on or mitigates earnings management. Overall, our evidence does not support the criticism from practitioners that short-term earnings guidance leads to more earnings management.     

管理层股权激励是否降低了公司过度投资——来自股权分置改革的经验证据

本文从股权分置制度变迁的角度研究管理层股权激励有效性及内在机理。以2005年股权分置改革为结构断点进行Chow检验,发现股权激励治理效应回归方程在2003—2009年全样本期间发生了显著的结构性变化,股权分置改革改善了管理层股权激励的治理效应,减少了过度投资。进一步研究表明,股权分置制度变迁对国有公司管理层股权激励效应影响显著,缓解了公司代理问题,但是对非国有公司没有显著影响。上述研究对于解决国有公司过度投资具有重要的现实意义。     

An empirical analysis of the effects of monitoring intensity on the relation between equity incentives and earnings management

Prior studies suggest that equity incentives inherently have both an interest alignment effect and an opportunistic financial reporting effect. Using three distinct proxies for earnings management we find evidence consistent with the incentive alignment (opportunistic financial reporting) effect of equity incentives increasing as monitoring intensity increases (decreases). Furthermore, using the accrual-based earnings management and meet/beat analyst forecast models we find that the opportunistic financial reporting effect of equity incentives dominates the incentive alignments effect for firms with low monitoring intensity. Using proxies for real earnings management, we find that the incentive alignment effect dominates the opportunistic financial reporting effect for high and moderate monitoring intensity firms. However, for low monitoring intensity firms the opportunistic reporting effect mitigates, but does not completely offset, the benefits of the incentive alignment effect. Overall, these findings are consistent with the level of monitoring affecting the relation between equity incentives and earnings management.     

How efficient ownership structure monitors income manipulation? Evidence of real earnings management among Malaysian firms

This study investigates income manipulation through real earnings management, by listed companies in Malaysia, prior to being officially designated as “financially distressed”, by this country’s stock exchange listed rules. The hypotheses relate to whether the degree of upwards real earnings management, conducted during the four-year period prior to financial distress, can be explained by ownership structure (measured with three variables: managerial ownership, institutional ownership and foreign ownership). Using a sample of 1180 firm-year observations of financially distressed companies, over the investigation period 2001–2011, the findings suggest that the degree of real earnings management is not associated with ownership by management or institutional investors. Conversely, the evidence indicates that foreign shareholders are able to constrain upwards real earnings management related to discretionary expenditure but not the operating cycle. This study contributes to the importance of diversity of ownership structures in monitoring income manipulation among firms.     

Debt Financing and Earnings Management: An Internal Capital Market Perspective

This paper investigates the role internal capital markets play in mitigating earnings management of group firms. We predict that the funding advantages of internal capital markets from business affiliates obscure solvency problems resulting from higher leverage for individual firms within a group, which in turn mitigates their incentives for earnings management. Using Taiwanese firms as a sample, we provide evidence that is consistent with such a prediction. In particular, we show that higher group profitability reduces its member firms’ sensitivity of earnings management to debt levels. Among business groups, earnings management in pyramidal groups is less sensitive to debt levels. We also find that the debt‐abnormal accrual curve becomes smoother as group profitability increases when considering the non‐monotonic relationship between firm leverage and earnings management.     

Can media deter management from manipulating earnings? Evidence from China

This study examines the influence of media exposure on managers’ earnings management behavior using China’s publicly traded firms during 2001–2009. We find that firms with more media exposure (both negative and non-negative) manage their earnings less than firms with less media exposure. We also find that “suspect firms” (being specially treated or with refinancing plans like seasoned equity offerings or right offerings) with more media exposure engage in more accrual-based earnings management relative to other firms. These results suggest that Chinese media serve as an external monitor to the majority of firms and place excessive pressure on suspect firms. This paper contributes incrementally to the literature by emphasizing the conflicting role media exposure plays in managerial decisions in earnings management. The findings of this study have practical implications for regulators, auditors, financial analysts, as well as other information intermediaries.