财务会计理论―Earnings management2a

1、1,Earnings Management,Chapters 11,2,Earnings Management (EM),Definition Choice of accounting policies to achieve some specific manager objective Can Also Include Management of Real Variables R&D, advertising, maintenance Timing of disposals,3,Earnings Management Techniques,Revenue Recognition Accoun

2、ting Policy Change Timing of Adoption of New Standards Restructuring, Writeoffs, Asset Sales, Provisions Accruals (Discretionary),4,Illustrations,5,Patterns of Earnings Management,Taking a bath. Income minimization: politically visible firm during periods of high profitability. Income maximization:

3、for bonus purposes and to avoid debt covenant violation. Income smoothing: portray a less risky income stream,6,Evidence of Earnings Management for Bonus Purposes,A contractual motivation Bonus plan hypothesis: to manage cash bonus (e.g. Healy 1985) Confined to bonuses based on net income Evidence o

4、f upward earnings management when net income between bogey and cap Measuring discretionary accruals Healy used total accruals as proxy Now usually based on Jones model,7,Other Earnings Management Motivations,Other contractual motivations Debt covenant hypothesis: to manage debt covenants (e.g. Sween

5、ey 1994) Political cost hypothesis To lower political “heat” (e.g. Jones (1991),8,Other Earnings Management Motivations,To meet investors earnings expectations Strong negative share price reaction if expectations not met Damage to manager reputation if expectations not met Initial public offerings:

6、To increase proceeds of new share issues Others: CEO Changes: Murphy & Zimmerman (1993) Taxation,9,Earnings Management,Opportunistic behavior (Bad EM),Efficient Contracting (Good EM),EM to convey managers information to investors,EM as a device to manipulate earnings,Different views of Earnings Mana

7、gement,Two versions of Earnings Management,10,Good Earnings Management,Blocked communication may inhibit direct disclosure of earnings expectations Discretionary accrual management as a way to credibly reveal managements inside information about earnings expectations (e.g. Demski & Sappington 1987)

8、Shareholders may also want to see the managers provide a high income figure too as this bind the management to a higher target.,11,Good Earnings Management,Manager foolish to report more earnings than can be maintained Manage reported earnings to an amount management expects will persist Earnings ma

9、nagement as a tool for the manager to communicate the firms expected long-run, persistent earnings potential.,12,Bad Earnings Management,Contracting Perspective Healy (1985) Jones (1991) Dechow, Sloan, and Sweeney (1996) Hanna (1999),13,Healy (1985) The Effect of Bonus Scheme on Accounting Decisions

10、. JAE. April 1985.,Bonus plan: bogies and caps If net income is low = take a bath. If income too high = shift to the future. Hence adopt income-increasing policies between bogies and cap. Results: Average accruals negative in the LOW group & in the high group: UPP Positive in the MID.,14,Jones (1991

11、),Jones, J: Earnings Management During Import Relief Investigation, JAR 1991. Studied actions of firms applying for import relief (ITC) to firms “unfairly” affected by foreign competition Almost all firms in sample: discretionary accruals significantly negative in ITC investigation years. Significan

12、t negative accruals not found in years immediately preceding and following investigation. Conclusion: Firms systematically chose accrual policies to improve their case for import relief protection, consistent with the political cost hypotheses.,15,Dechow, Sloan and Sweeney (1996),Evidence based on 9

13、2 firms charged by the US SEC for accounting matters These firms succeeded at borrowing more and issuing more securities,16,Cookie Jar Accounting (Hanna 1999),Investors and analysts look to core earnings, ignoring provisions for extraordinary and non-recurring items Manager compensation calculations

14、 often not penalize non-core provisions, such as writedowns & provisions for restructuring But current non-core provisions may increase core earnings in future years, through lower amortization and absorption of future costs cookie-jar accounting As a result, managers tempted to “overdose” on non-co

15、re provisions, thereby putting earnings “in the bank”,17,Nortel Network Corp,In 2001 and 2002, $5B provisions made for the cost of contract cancellations, bad debts, layoff, plant closures, overstating the losses of these 2 years. In 2003, Nortel reversed “excess” provisions by crediting to operatin

16、g expense, without proper disclosure Nortels compensation plan provided for bonuses if the company returned to profitability. Senior executives received millions in bonuses in 2003 based on overstated profits. Result: class action lawsuits, CEO, CFO and controller fired. Loss of confidence. File for

17、 bankruptcy in 2009.,18,Standard setters response to bad earnings management,SFAS 146: Prohibited recording liability for restructuring until a real liability has incurred. Provision measured at fair value. Excess provisions not allowed IAS 37 Provision for payments must be probable and capable of r

18、eliable estimation. Provision valued at fair value No excess provision Provisions must be used only to absorb costs for which provision originally set up,19,Standard setters response to bad earnings management,Does the standards solve problem of abuse of provisions? Management controls timing Fair v

19、alues require estimation,20,Other issues,21,Accrual Quality (Dechow & Dichev 2002),Good accrual should be explainable by the cash flow in nearby periods. E.G. Authentic accrued liability should show up in operating cash outflow next period. Good accrued revenue should show up in operating cash inflo

20、w next period WCt = j + 1CFOt-1 + 2CFOt+ 3CFOt+1+ jt Where WCt is the change in non-cash working capital, and CFO is cash from operation. Any steady trend of increasing (or decreasing) accrual not explained by CFOs (and Sales, Purchases, Depreciation) should be watched with suspicion.,22,Dechow (199

21、4)Accrual: efficient contracting or opportunism?,Hypotheses: If accruals = opportunistic manipulation: Efficient market rejects earnings in favor of cash flows, then cash flows (rather than income) should be more correlated with returns. If accrual reflects efficient contracting: Net income should b

22、e more highly associated with share returns (than cash flows),23,Dechow (1994)Accrual: efficient contracting or opportunism?,Results: Stock market returns correlate more with earnings than with cash flows For firms with large accruals, earnings are even more correlated with stock returns. Conclusion

23、: Accrual income more closely measured firm performance than CFO. Accrual provides useful information content,24,Earnings Management at General Electric,Earnings management devices used by GE Assumed rate of return on pension funds Restructuring charges Acquisitions, sales of divisions Conservative

24、accounting practices Sales of leased aircraft Allocation of goodwill on purchase of subsidiaries Earnings management devices used in harmony to report steadily increasing earnings,25,Earnings Management at General Electric,GE Reported Net Income (Millions) 2008 $17, 235 2007 22,208 2006 20,700 2005

25、16,353 2004 16,593 2003 15,002 2002 14,118,2001 $13,684 2000 12,735 1999 10,717 1998 9,296 1997 8,203 1996 7,280 1995 6,573 1994 4,726 1993 4,315,26,Earnings Management at General Electric,Note argument that even under securities market efficiency, GE is so large and complex that even analysts canno

26、t prepare accurate earnings forecasts Management has best inside information about expected persistent earnings Direct communication blocked Creates role for earnings management to reveal managements expected persistent earnings,27,Earnings Management at General Electric,Note: GE reports lower earnings for quarter ended March 31, 2008 Share price falls by 13% Why did share price fall?,28,Meeting Earnings Expectations