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Earnings management: emerging insights in theory, practice, and research

Author: Ronen, Joshua ; Yaari, Varda Series: Springer series in accounting scholarship Publisher: Springer, 2008.Language: EnglishDescription: 581 p. : Graphs ; 24 cm.ISBN: 9780387257693Type of document: BookBibliography/Index: Includes bibliographical references and index
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Item type Current location Collection Call number Status Date due Barcode Item holds
Book Europe Campus
Main Collection
Print HG4028 .P7 R66 2008
(Browse shelf)
001270891
Available 001270891
Total holds: 0

Includes bibliographical references and index

Digitized

Earnings Management
Emerging Insights in Theory,
Practice, and Research
Contents
Introductionxiii..............................................................................................
The Demand for Earnings Management Researchxiv.................................
Historical Perspective: The Milestonesxvi..................................................
The Plan of the Bookxviii............................................................................
Acknowledgmentsxix..................................................................................
Part 11.............................................................................................................
1 The Importance of Earnings5...................................................................
1.1 The Dual Role of Accounting6..............................................................
1.2 The Value Relevance of Earnings8.......................................................
1.2.1 The Costly-Contracting Approach10........................................
1.2.2 The Decision-Making Approach15...........................................
1.2.3 The Legal-Political Approach19...............................................
1.3 Summary23............................................................................................
2 Definition of Earnings Management25.....................................................
2.1 Definition25...........................................................................................
2.2 The Methods to Manage Earnings31.....................................................
2.3 Managing GAAP Earnings Through Pro Forma Earnings34................
2.4 Summary38............................................................................................
Part 239...........................................................................................................
The Players41..............................................................................................
The Sarbanes-Oxley Act43.........................................................................
The Motivation for the Sarbanes-Oxley Act44...........................................
Research on the Sarbanes-Oxley Act45......................................................
The Plan of Part 253....................................................................................
3 The Management57....................................................................................
3.1 Background58........................................................................................
3.1.1 The Role of Management in Reporting Earnings58..................
3.1.2 The Management's Objective Function60.................................
3.2 Compensation69....................................................................................
3.2.1 The Compensation Package70....................................................
3.2.2 Cash Compensation: Salary and Bonus74..................................
3.2.3 Managing Salary76.....................................................................
3.2.4 Managing Bonuses77..................................................................
3.2.5 More on Managing Cash Compensation80................................
3.2.6 Stock and Options80...................................................................
3.2.7 Equity Holdings and Earnings Management84..........................
3.2.8 Options and Earnings Management86........................................
3.2.9 Grant Date87...............................................................................
3.2.10 Accounting Recognition89.......................................................
3.2.11 Timing of the Exercise91.........................................................3.2.12 Related Operating, Investment, and Financing
Decisions92..............................................................................
3.3 CEO Turnover93...................................................................................
3.3.1 Departure93................................................................................
3.3.2 CEO Departure and Earnings Management96...........................
3.3.3 The Incoming CEO99.................................................................
3.4 Insider Trading101................................................................................
3.4.1 Insider Trading and Earnings Management108.........................
3.5 Management Buyouts110......................................................................
4 Users113.......................................................................................................
4.1 Shareholders 114.....................................................................................
4.1.1 The Price-Setting Process 115....................................................
4.1.2 The Impact of Earnings on the Share Price1164.1.3 The Effect of Earnings Management
on Shareholders' Information116.............................................4.1.4 When Does the Market Learn about Non-neutral
Earnings Management?121......................................................
4.2 Earnings-Management Events135..........................................................
4.2.1 Benchmark Beating135..............................................................
4.2.2 Equity Issues and New Listings145............................................
4.2.3 Mergers and Stock-for-Stock Acquisitions153..........................
4.3 Bondholders and other Creditors156......................................................
4.3.1 Background156...........................................................................
4.3.2 The Importance of Earnings to Debt Contracts159....................
4.3.3 Earnings Management and Debt Contracts 161.........................
4.4 Regulators171.........................................................................................
4.4.1 Tax Expense and Deferred Taxes173.........................................4.4.2 Regulated Industries: Insurance Companies
and Banks178...........................................................................
4.5 Employees...................................................................................... 181
4.6 Competitors, Suppliers, and Customers........................................182
Appendix......................................................................................184
5 Gatekeepers..........................................................................................187
5.1 The Demand for Gatekeepers.........................................................187
5.2 Analysts..........................................................................................191
5.2.1 Background.........................................................................192
5.2.2 Decision Making and Incentives........................................196
5.2.3 Analysts in the TWENTY-FIRST Century........................205
5.2.4 Meeting or Beating Expectations—MBE...........................207
5.3 Governance—Ownership...............................................................220
5.3.1 A Definition and the Framework of U.S.
Corporate Governance......................................................220
5.3.2 Shareholders.......................................................................223
5.3.3 The Importance of Earnings...............................................231
5.3.4 Earnings Management........................................................234
5.4. Governance—the Board of Directors............................................236
5.4.1 Introduction........................................................................236
5.4.2 Board Characteristics.........................................................242
5.5 Auditors..........................................................................................263
5.5.1 The Institutional Setting of the Relationships
Between Auditors and Management Before SOX...........264
5.5.2 Earnings Management........................................................277
5.6 The Press.........................................................................................281
Part 3........................................................................................................285
The Demand for Theory......................................................................287
The Plan of Part 3................................................................................289
Capital Markets...............................................................................289
Governance......................................................................................290
Product and Factor Markets............................................................291
The LegaUPolitical/Regulatory System..........................................291
6 Truth-Telling........................................................................................293
6.1 Capital Markets...............................................................................293
6.1.1 The Disclosure Principle....................................................295
6.1.2 Signaling Equilibria............................................................296
6.1.3 Signal Jamming..................................................................298
6.1.4 Randomized Strategies.......................................................299
6.2 Governance.....................................................................................301
6.3 Product/Factor Markets..................................................................305
6.3.1 Credibility as a Valuable Asset..........................................306
6.3.2 Tacit Cooperation Among Firms........................................308
6.3.3 Multiple Audiences Exert Conflicting Pressures...............309
6.4 Regulation.......................................................................................311
6.4.1 The Financial Reports Insurance Setting............................312
Appendix: The Disclosure Principle............................................314
7 Smoothing.............................................................................................317
7.1 Capital Markets...............................................................................319
7.1.1 The Stock Market................................................................319
7.1.2 The Banking System...........................................................325
7.2 Governance......................................................................................328
7.2.1 Real Smoothing...................................................................329
7.2.2 Artificial Smoothing............................................................332
7.3 Product Market Competition...........................................................333
7.4 Regulation.......................................................................................335
Appendix: Artificial Smoothing Motivated by Consumption
Smoothing....................................................................................336
7.5.1 The Game............................................................................336
7.5.2 Issues...................................................................................339
8 Maximization and Minimization.........................................................341
8.1 Capital Market.................................................................................343
8.1.1 The Equilibrium..................................................................345
8.1.2 The Earnings Response Coefficient....................................347
8.2 Governance......................................................................................353
8.3 The Competitive Environment........................................................358
8.4 Regulation.......................................................................................361 8.4.1 The Effect of Voluntary Disclosure on the ERC
When the Firm Manages Earnings....................................361
8.4.2 The Analytical Model..........................................................361 8.4.3 The Effect of Earnings Management on the Value
of Rule 10b-5.....................................................................363
8.4.4 The Effect of Regulation on Earnings Management...........365
8.5 Summary.........................................................................................366
Part 4........................................................................................................369
Accruals.................................................................................................371
The Plan of Part 4..................................................................................375
9 The Accruals Process...........................................................................377
9.1 Non-Discretionary Accruals............................................................377
9.1.1 The Non-Discretionary Accruals Generation Process .......377
9.1.2 The Statistical Properties of Accruals.................................380
9.2 The Effect of Earnings Management on Accruals...........................381
9.2.1 The Statistical Properties of Managed Accruals.................382
9.3 Accruals and Cash Flows.................................................................384
9.3.1 Accruals Mispricing............................................................384
9.3.2 Highlights of the Research..................................................385
Appendix: Accruals When the Firm Carries Inventories............387
The Model....................................................................................387
Accruals.......................................................................................388
10 The Accruals Methodology...............................................................389
10.1 The Evolution of Accruals-based Research..................................389
10.1.1 Ronen and Sadan (1981)...................................................390
10.1.2 Healy (1985).....................................................................394
10.1.3 DeAngelo (1986, 1988a)...................................................399
10.1.4 Dechow and Sloan (1991).................................................402
10.1.5 The Jones Model...............................................................404
10.2 An Evaluation of the Jones Model................................................407
10.2.1 Unexplored Questions.......................................................407
10.2.2 Evaluations of the Jones Model........................................414
10.2.3 The Tests of the Efficiency of the Jones Model...............424
11 Modifications to the Jones Model and Alternative
Methodologies.....................................................................................433
11.1 Improved Jones Models................................................................433
11.1.1 The Modified Jones Model...............................................434
11.1.2 The Forward-Looking Model............................................437
11.1.3 The Performance-Adjusted Models..................................439
11.1.4 The Business Model: A Synthesis....................................446 11.2 Alternative Methodologies for Detecting
Earnings Management...........................................................................449
11.2.1 Analysis of a Single Account............................................450
11.2.2 The Distributional Approach............................................454
11.2.3 Rounding EPS...................................................................454
Summary and Postscript........................................................................457
Overview of the Book..........................................................................457
Lessons.................................................................................................459
Related Research.................................................................................460
Bibliography............................................................................................463
Index.........................................................................................................577

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