英文presentation.doc

slide 1:slide 2: slide 3: First the authors examine whether there are differences in Earnings Management across countriesSecond, the authors specify several measures that partly explain the different levels of EM across countriesslide 4: The idea is that earnings management is more pervasive in countries with weak investor protection. The reason is that private control benefits are smaller in a country with strong outside investor protection. Therefore the incentives for EM are weaker. slide 5: Argentina, Mexico and Brazil are dropped because these countries had hyperinflation during the sample period. However, the results are qualitatively unchanged if these countries remain in the sample. slide 6: Table 1 in alphabetical orderFirm Size - is measured as total US$ sales (later all financial measures are scaled by the lagged value of total assets results are robust to scaling by other variables)Capital Intensity is measured as the ratio of long term assets over total assetsFraction of manufacturing firms firm year observations with SIC 2000 to 3999Per Capital GDP - Average per capita GDP in constant 1995 US $ from 1990 to 1999Inflation measured as the average percentage change in consumer prices from 1990 to 1998 Volatility of GDP standard deviation of the growth rate in real per capita GDP from 1990 to 1998US highest median firm sizeSwitzerland highest per capita GDPJapan lowest in InflationFinland most volatile GDP growthslide 7: The authors employ four different measures of earnings management on the country level. The first measure of EM is the countrys median ratio of the firm level standard deviation of operating earnings divided by the firm-level standard deviation of cash flow from operations. The scaling by the CF from operations controls for the underlying true economic variability. CA change in current assetscash change in cashCL current liabilitiesSTD short term debtTP change in income tax payableDep Depreciation and Amortization Expenseslide 8: If a company has a low cash flow number it will make adjustments to the cash flow with higher accrualsslide 9: To mitigate measurement errorslide 10: Table 2 Panel A sorted by the ranking of the aggregate ranking Austria showing highest EM measure EM1 countries with a low EM1-ratio have smoother earnings (low variability in earnings relative to cash flows) (Austria)EM2 a high negative EM2 (correlation) number indicates that earnings smoothing is common in this country (Greece)EM3 is a measure of discretion in reporting earnings, the score shows the absolute value of accruals relative to the absolute value of cash flows a higher value indicates higher discretion (Germany)EM4 the ratio of small reported profits to small reported losses the higher the more earnings management (Austria on top) Aggregate measure is the average ranking Slide 11: Table 2 Panel A sorted by the ranking of the aggregate ranking Austria showing highest EM measure EM1 countries with a low EM1-ratio have smoother earnings (low variability in earnings relative to cash flows) (Austria)EM2 a high negative EM2 (correlation) number indicates that earnings smoothing is common in this country (Greece)EM3 is a measure of discretion in reporting earnings, the score shows the absolute value of accruals relative to the absolute value of cash flows a higher value indicates higher discretion (Germany)EM4 the ratio of small reported profits to small reported losses the higher the more earnings management (Austria on top)Aggregate measure is the average rankingslide 12: Table 2 Panel BAll the measures are taken from the La Porta 1998 or the 1997 paper. Legal Origin the origin of the legal systemLegal Tradition common law (CM) and code law is indicated by (CD)Outside Investor rights is an aggregate measure of minority shareholder rights ranges from zero to five (zero low rights, 5 high rights)Legal Enforcement is the mean score across three measures, ranges from zero to 10 (10 high enforcement)Importance of Equity Markets is the mean rank across three variables from the La Porta 1997 paper:Ratio of aggregate stock market capitalization held by minorities to gross national productNumber of listed domestic firms relative to the populationNumber of IPOs relative the population the higher the score the higher is the importance of the stock marketOwnership Concentration the median percentage of common shares owned by the largest three shareholders in the ten largest privately owned non-financial firmsDisclosure Index measures the inclusion of 90 items in the 1990 annual reports (La Porta et. Al 1990)slide 13:As expected, OIR, LE, IEM and the DI are negatively correlated with the aggregate measure of Earnings Management. The Ownership concentration is positively correlated with the aggregate measure of Earnings Management. slide 14: This table shows countries grouped intro 3 clusters based on nine institutional variables from the La Porta papers (1997, 1998) . This analysis shows on a more descriptive level if the level of earnings management is different between these clusters.Cluster 1 is characterized by large stock markets, low ownership concentration, extensive outsider rights, high disclosure and strong legal enforcementCluster 2 smaller stock markets, higher ownership concentration, weaker investor protection, lower disclosure levelsBut strong legal enforcementCluster 3 like cluster 2 but weak legal enforcementYou see that C1 is MORE different from C2 or C3 than C2 from C3slide 15: The authors pose the question of which institutional factors really are the primary determinants of earnings management and which are merely correlated outcomes? they conclude that Investor protection is the primary factor that explains part of the differences in the level of earnings management across countries. Outside Investor Rights: index from La Porta from zero to five, the higher the more rightsLegal Enforcement: average score across three measures from La Porta, the higher the more enforcement, Private Control Benefits: Average Block Premium from Dyck and Zingales (2002) based on transfers of controlling blocks of shares The multiple regressions examine the relationship between the level of earnings management and investor protection:First column: Shows that outside investor rights and legal enforcement have a significant negative association with AEMThe multiple regression assumes that OIR and LE are exogenous variables But what if OIR and LE are determined simultaneously and thus interdependent endogeneity biasSecond column: (2 stage least square regression)The instrumental variables are: 3 dummy variables for legal origin English, Scandinavian, German and FrenchCountrys average GDP from 1980 to 1989 because effective legal infrastructure is costlyThese variables can be considered as exogenous for this analysis1st step: run regression of OIR on instrumentals and LE on instrumentals get prediction of OIR and LE2nd step: regress AEM on OIR and LEThird column:Offers a direct estimate of the relation between private control benefits and earnings management1st step: regress PCB on OIR and LE come up with prediction PCB2nd step: regress AEM on PCBShows that Private Control Benefits and Earnings Management are highly positively associated! slide 16: In the final section of the paper the authors perform several robustness checks.One concern is whether the results are driven by the different accounting rules in the countries. Keep in mind that each countrys GAAP is partly determined by its approach to investor protection. They re-estimate the main regression and include an accrual rules index (Hung 2001) as a control. The coefficient on the