Earnings Quality in a Bubble Period: The Case of Construction Activity Firms in Spain

Housing bubbles may result in deep crises that affect all economic systems. This study investigates how the recent housing bubble in Spain has affected earnings quality during the whole bubble. To this end, we use data on mostly private construction activity firms in Spain, that is, construction and real estate companies. Earnings quality is studied by means of the predictive ability of earnings, conservatism, discretionary accruals and real earnings management. The results indicate a progressive decrease in the quality of financial reporting as the bubble develops, as managers try to conceal an underlying downward trend. We further show that earnings quality continues to decline even after the bubble bursts. Overall, this contribution, together with those of other environments, may suggest that, in a bubble context, we have to take care of firms’ earnings quality even some years before the crisis comes to the fore.     

Crisis risk and risk management

We assess the state of knowledge about crisis risk and its implications for risk management. Data that became available after the global financial crisis show that some types of crises are predictable when accounting for interactions between risks. However, other types of crises do not seem predictable. There is no evidence that the frequency of economic and financial crises is increasing. While data show that an economic crisis is more likely following a political crisis, there is no comparable evidence for climate events. Strategies that increase firm operational and financial flexibility reduce the adverse impact of crises on firms.     

Transparency,Value Creation,and Financial Crises

This article reports the findings of the authors' recent study of the impact of the level of corporate transparency on shareholder value creation during periods of financial crisis. Their sample consists of the companies comprising Spain's IBEX 35 stock index during the ten‐year period 2000–2010. The study uses three different measures of earnings management (EM) as inverse indicators of the quality of disclosure and carries out fixed effects regressions that adjust for firm and industry characteristics, two periods of financial crises, and the passage of time. The main findings of the study are that (1) companies with lower disclosure quality have generated less value for their shareholders over long time periods and that (2) the shareholders of companies that were more aggressive in managing their earnings experienced greater wealth destruction during the two financial crises of the last decade. Given the still unfolding impact of the recent global financial crisis, as reflected in the current debt crisis in Western European countries, the authors' study reinforces the importance of the current debate over the benefits and costs of increasing the regulation of financial markets, especially in the areas of transparency and disclosure requirements.     

Fund Management and Systemic Risk – Lessons from the Global Financial Crisis

Fund managers play an important role in increasing efficiency and stability in financial markets. But research also indicates that fund management in certain circumstances may contribute to the buildup of systemic risk and severity of financial crises. The global financial crisis provided a number of new experiences on the contribution of fund managers to systemic risk. In this article, we focus on these lessons from the crisis. We distinguish between three sources of systemic risk in the financial system that may arise from fund management: insufficient credit risk transfer to fund managers; runs on funds that cause sudden reductions in funding to banks and other financial entities; and contagion through business ties between fund managers and their sponsors. Our discussion relates to the current intense debate on the role the so‐called shadow banking system played in the global financial crisis. Several regulatory initiatives have been launched or suggested to reduce the systemic risk arising from non‐bank financial entities, and we briefly discuss the likely impact of these on the sources of systemic risk outlined in the article.     

Covid-19 pandemic,a catalyst for aggressive earnings management by banks?

This paper investigates the effects of the Covid-19 pandemic on the financial reporting quality of European banks by examining the occurrence of earnings management specifically income smoothing. Using a sample of listed European banks, we employ panel estimation to compare income smoothing in the pre-pandemic period (2019Q1-2019Q4) and the pandemic period (2020Q1-2021Q4). We find that earnings management has significantly increased during the pandemic years, evidencing how the quality of financial reporting is affected during the crisis period. Our findings further suggest that amid the crisis, governance quality limits the incidence of earnings management and emphasizes how the strength of country-level governance and institutional framework affects the quality of financial reporting. Further analysis shows that though banks are inclined to manage earnings during a crisis, nevertheless, the presence of high-quality audit is a limiting factor on the incidence of earnings management in the face of crisis. Our findings which are relevant to investors, market participants, and regulators among others make a significant contribution to the accounting literature and specifically complement the strand of literature on the discretionary use of loan loss provision for earnings management during crisis.     

Size and earnings volatility of US bank holding companies

We examine whether bank earnings volatility depends on bank size. Using quarterly data for bank holding companies in the United States for the period 1995Q1–2010Q3 and controlling for the quality of management, leverage, and diversification, we find that bank size reduces return volatility. However, the effect is non-linear: when bank size exceeds a certain threshold (about US$5 billion) size is positively related to earnings volatility. The recent financial crisis decreased the threshold beyond which the impact of size on volatility turns positive.     

CEO权力、董事会稳定性与盈余管理

基于CEO和董事会相对权力的视角,研究了CEO权力和董事会稳定性对盈余质量的影响。研究发现,CEO权力越大,上市公司盈余管理程度越高;而稳定的董事会能够有效削弱CEO权力与盈余管理之间的正相关关系。区分企业产权性质后发现,上述研究结论主要体现在民营企业中。进一步研究发现,CEO任期较短时,CEO相对董事会的权力较小,稳定的董事会能够有效削弱CEO权力与盈余管理之间的正相关关系。但随着CEO任期的增长,CEO相对于董事会的权力越强,董事会并不能有效监督CEO操纵盈余管理行为。     

Financial crisis,structure and reform

In this study, we examine the relationship between the structure of financial systems and financial crises. Using cross-country data on financial structures and crises, we find that there is a significant short-term reversal in development of the banking sector and the stock market during both bank crises and market crashes, with the corporate bond market moving in the same direction as bank credit. However, the results are significant for countries with market-based financial systems but not for countries with bank-based financial systems. Emerging markets have mainly bank-based financial systems, which may explain why these markets require more time to recover from economic downturns after a financial crisis. Therefore, we argue that governments should emphasize a balanced financial system structure as it helps countries to recover from financial crises more quickly compared with countries that lack such balanced structures.     

Audit committee financial expertise and properties of analyst earnings forecasts

An important role of financial accounting information is to aid financial statement users in forming expectations about the firm's future earnings. Prior research finds that accounting financial expertise of the audit committee is associated with higher financial reporting quality. We extend this literature by examining the association between audit committee financial expertise and analysts' ability to anticipate future earnings. We find a significant association between accounting financial expertise on the audit committee and analyst earnings forecasts that are more accurate and less dispersed. In contrast, we do not find a significant association between non-accounting financial expertise (i.e., supervisory expertise) and forecast accuracy or forecast dispersion. These findings contribute to our understanding of the benefits of accounting expertise in audit committees by demonstrating an association between accounting financial expertise and improvements in analyst earnings forecasts.     

Sovereign debt disputes: A database on government coerciveness during debt crises

This paper measures “debt disputes” between governments and foreign private creditors in periods of sovereign debt crises. We construct an index of government coerciveness, consisting of 9 objective sub-indicators. Each of these sub-indicators captures unilateral government actions imposed on foreign banks and bondholders. The results provide the first systematic account of debt crises that goes beyond a binary categorization of default versus non-default. Overall, government behavior and rhetoric show a strong variability, ranging from highly confrontational to very smooth crisis resolution processes. In a preliminary analysis on the determinants of coercive behavior, we find political institutions to be significant, while economic and financial factors play a lesser role. These results open up an agenda for future research.     

Financial crisis and accounting quality: Evidence from five European countries

This study investigates how the economic crisis affects the scope for earnings manipulation and the value relevance of reported financial numbers for companies that are audited by a big 4 auditor. The analysis is focused on Portuguese, Irish, Italian, Greek and Spanish listed companies. The findings show that Portugal, Italy and Greece tend to engage more in earnings management in their effort to improve their lower profitability and liquidity, and accommodate their higher debt and growth. Ireland exhibits less evidence of earnings manipulation, while the findings for Spain are to some extent conflicting. Additionally, the reported financial numbers of Portuguese and Greek companies that are audited by a big 4 auditor were found to be of higher quality before the crisis. In contrast, Irish, Italian and Spanish companies report more value relevant financial numbers during the crisis. The results of this study are particularly useful for accounting regulators when preparing accounting rules that seek to reduce information asymmetry and earnings manipulation and increase the quality of reported disclosures in light of a crisis and for investors that need further assistance for the establishment of a profitable investment strategy in periods characterized by high uncertainty and volatility.     

Governance and bank characteristics in the credit and sovereign debt crises – the impact of CEO power

The global financial sector recently suffered from two interrelated crises: the credit crisis and the sovereign debt crisis. A common question is whether the recent experience with the credit crisis has helped in dealing with the sovereign debt crisis. We study more specifically whether banks with powerful CEOs perform better or worse than other banks, and if there is any difference in this relationship between the two crises. Using unique hand-collected data for 378 large global banks, we find that CEO power has a significant positive relation to bank profitability and asset quality, but also to insolvency risk, during the sovereign debt crisis. Thus, strong CEOs do not appear to be detrimental to bank performance. Our results also support the idea that deposit insurance may have contributed to the credit crisis.     

Political Uncertainty, Financial Crisis and Market Volatility

This paper examines the impact of political uncertainty on financial crises using a panel of 22 emerging markets. By examining political election cycles, we find that eight out of nine of the financial crises happened during the periods of political election and transition. Using a combination of probit and switching regression analysis, we find that there is a significant relationship between political election and financial crisis after controlling for differences in economic and financial conditions. We observe increased market volatility during political election and transition periods. Our results suggest that political uncertainty could be a major contributing factor to financial crisis. Thus, politics does matter in emerging markets. Since the odds of financial crisis tend to be much larger during the political election periods, institutional investors should take that into account when making emerging market investment during those time periods.     

ACCRUAL MANAGEMENT TO MEET EARNINGS TARGETS: UK EVIDENCE PRE- AND POST-CADBURY

Central to both the Cadbury Committee’s initial remit and its subsequent recommendations is the view that director integrity and board effectiveness play key roles in ensuring the quality and reliability of published financial statements. Using a constant sample, this paper tests whether the association between board composition and earnings management activity differs between the pre- and post-Cadbury periods. Earnings management is measured by the use of income-increasing abnormal accruals when unmanaged earnings undershoot target earnings. Results provide evidence of accrual management to meet earnings targets in both periods. However, while we find no evidence of an association between the degree of accrual management and the composition of the board of directors in the pre-Cadbury period, results for the post-Cadbury period indicate less income-increasing accrual management to avoid earnings losses or earnings declines when the proportion of non-executive directors is high. These results are consistent with the view that appropriately structured boards are discharging their financial reporting duties more effectively post-Cadbury.     

盈余管理问题初探

近年来,会计信息的质量问题普遍堪忧.盈余管理问题是影响会计信息质量的一大因素.对盈余管理的研究要正确划分盈余管理与财务欺诈的界限.另外,要认清盈余管理可能造成的后果.本文的研究重点在于盈余管理的资本市场动因以及影响,并提出正确判断企业是否存在盈余管理应解决的标准问题.     

CEO职业关注与企业会计信息披露质量

依据2001-2019年沪深两市A股上市公司数据,以C EO年龄水平作为职业关注水平的代理变量,考量CEO职业关注对企业会计信息披露质量的影响.结果表明:CEO职业关注降低了企业的会计信息披露质量,CEO职业关注水平较高时,企业盈余管理倾向更强,应计质量更差,发生盈余粉饰的可能性更高.进一步分析发现,企业正向盈余管理倾向是C EO职业关注影响会计信息披露质量的渠道,职业关注与会计信息披露质量的关系受到财务业绩压力的干扰.     

The impact of SOX on opportunistic management behavior

An innovative aspect of this study is the use of a relatively new metric to capture opportunistic earnings management behavior. We define opportunistic earnings management as the difference between a firm's US-GAAP earnings and ex post earnings consensus derived from forecasts of financial analysts who follow that firm. Using over 24,500 quarterly reports of over 2,500 publicly-traded companies spanning two three-year periods, and controlling for factors previously linked to having an effect on earnings management and analysts forecast effort, we find statistical evidence supporting the proposition that, in the aggregate, the Sarbanes–Oxley Act (SOX) has served as a constraint on curbing opportunistic earnings management behavior, and thus should be considered as an effective means to improve the quality of financial reporting information.     

Monetary policy under financial uncertainty

Monetary policy may play a substantial role in mitigating the effects of financial crises. In this paper, I suppose that the economy occasionally but infrequently experiences crises, where financial variables affect the broader economy. I analyze optimal monetary policy under such financial uncertainty, where policymakers recognize the possibility of crises. Optimal monetary policy is affected during the crisis and in normal times, as policymakers guard against the possibility of crises. In the estimated model this effect is quite small. Optimal policy does change substantially during a crisis, but uncertainty about crises has relatively little effect.     

Earnings and capital management and signaling: the use of loan-loss provisions by European banks

This paper investigates the relationship between loan-loss provisions (LLPs) and earnings management in the context of the capital adequacy of Euro Area (EA) banks versus non-EA credit institutions. This paper also examines whether LLPs signal managements’ expectations concerning future bank profits to investors. Additionally, this paper traces the role of bank regulations and creditor protection systems in explaining income smoothing. Evidence drawn from the 1996 to 2006 period indicates that LLPs do reflect changes in the expected quality of a bank's loan portfolio for both groups of banks, and that earnings management is an important determinant of LLPs for EA intermediaries, whereas non-EA credit institutions use LLPs to signal private information to outsiders. The paper also finds that higher protection of creditors’ rights significantly reduces the incentives to smooth earnings for EA banks. During the recent financial crisis, EA bank managers are much more concerned with their credit portfolio quality and do not use LLPs for discretionary purposes, whereas LLPs at non-EA banks are used to smooth income more than for the purposes of managing capital ratios or conveying private information about future performance to the market.     

The influence of accounting enforcement on earnings quality of banks: Implications of bank regulation and the global financial crisis

We study the effects of country-level accounting enforcement on earnings quality of banks and whether bank regulation substitutes or complements the effect of accounting enforcement on bank earnings quality. We also examine whether the influence of accounting enforcement on bank earnings quality changed after the global financial crisis. Using a sample of listed banks from 40 countries between 2001 and 2014, and abnormal loan loss provisions (ALLP) as our main proxy for earnings quality, we document a consistent and strong association between accounting enforcement and bank earnings quality. More specifically, an increase in accounting enforcement decreases the level of ALLP and decreases the propensity to manage earnings to avoid losses. Furthermore, we provide empirical evidence that bank regulation complements the effect of accounting enforcement on bank earnings quality. Finally, unlike in the pre-crisis period, we find a positive association between accounting enforcement and income-decreasing ALLP in the post-crisis period, which indicates that stronger accounting enforcement is associated with more conservative earnings and higher loan loss reserves. Overall, our results indicate that accounting enforcement reduces opportunistic earnings management.