Do Firms Use Restructuring Charge Reversals to Meet Earnings Targets?

2002 ◽  
Author(s):  
Stephen R. Moehrle
Keyword(s):  
Earnings Targets ◽  
Restructuring Charge

Do Firms Use Restructuring Charge Reversals to Meet Earnings Targets?

2002 ◽  
Vol 77 (2) ◽  
pp. 397-413 ◽  
Author(s):  
Stephen R. Moehrle
Keyword(s):  
Net Income ◽  
Restructuring Charges ◽  
Earnings Targets ◽  
Restructuring Charge

Many firms that take restructuring charges reverse a portion of those restructuring charge accruals in a later quarter. These reversals increase net income, often substantially. In this study, I investigate whether restructuring charge reversals are associated with incentives to meet or exceed analysts' forecasts, avoid earnings declines relative to prior-year levels, and avoid losses. I examine both the decision to record a reversal and the amount of the reversal, using a sample of 121 reversals recorded between 1990 and 1999. The results suggest that some firms record reversals to beat analysts' forecasts and to avoid reporting net losses. There is also some evidence that firms record reversals to avoid earnings declines. Overall, the results are consistent with firms using restructuring accrual reversals to manage earnings.

Restructuring Charges and CEO Cash Compensation: A Reexamination

2003 ◽  
Vol 78 (1) ◽  
pp. 169-192 ◽  
Author(s):  
Davit Adut ◽  
William H. Cready ◽  
Thomas J. Lopez
Keyword(s):  
Adverse Effect ◽  
Executive Compensation ◽  
The Other ◽  
Cross Sectional ◽  
Factors Associated ◽  
Cash Compensation ◽  
Restructuring Charges ◽  
Restructuring Charge ◽  
A Charge ◽  
Compensation Committees

Prior research generally concludes that compensation committees completely shield executive compensation from the effect of restructuring charges on earnings. In contrast, we find that after controlling for the growth in annual inflation-adjusted CEO cash compensation, compensation committees only partially shield CEO compensation from the adverse effect of restructuring charges on earnings, on average. In further analyses, we identify factors associated with cross-sectional differences in the extent of shielding. Specifically, we find that compensation committees appear to: (1) completely shield initial and subsequent restructuring charges for CEOs with long tenure, provided that the firm had not recorded a charge in the two immediately prior years; (2) provide no shielding of subsequent restructuring charges taken by short-tenured CEOs if the firm reported a prior restructuring charge within two years of the current charge; (3) and partially shield the other categories of restructuring charges. Overall, this study provides evidence that compensation committees evaluate the context of each restructuring in determining the extent to which they will intervene to shield executive compensation from the effect of these charges.

Has the Regulation of Non-GAAP Disclosures Influenced Managers’ Use of Aggressive Earnings Exclusions?

2016 ◽  
Vol 32 (2) ◽  
pp. 209-240 ◽  
Author(s):  
Ervin L. Black ◽  
Theodore E. Christensen ◽  
Paraskevi Vicky Kiosse ◽  
Thomas D. Steffen
Keyword(s):  
The United States ◽  
Preliminary Evidence ◽  
Securities And Exchange Commission ◽  
Regulatory Environment ◽  
Fraud Risk ◽  
Sarbanes Oxley ◽  
Two Measures ◽  
Earnings Targets ◽  
Pro Forma ◽  
Estimate System

The frequency of non-GAAP (or “pro forma”) reporting has continued to increase in the United States over the last decade, despite preliminary evidence that regulatory intervention led to a decline in non-GAAP disclosures. In particular, the Sarbanes–Oxley Act of 2002 (SOX) and Regulation G (2003) impose strict requirements related to the reporting of non-GAAP numbers. More recently, the Securities and Exchange Commission (SEC) has renewed its emphasis on non-GAAP reporting and declared it a “fraud risk factor.” Given the SEC’s renewed emphasis on non-GAAP disclosures, we explore the extent to which regulation has curbed potentially misleading disclosures by investigating two measures of aggressive non-GAAP reporting. Consistent with the intent of Congress and the SEC, we find some evidence that managers report adjusted earnings metrics more cautiously in the post-SOX regulatory environment. Specifically, the results suggest that firms reporting non-GAAP earnings in the post-SOX period are less likely to (a) exclude recurring items incremental to those excluded by analysts and (b) use non-GAAP exclusions to meet strategic earnings targets on a non-GAAP basis that they miss based on Institutional Brokers’ Estimate System (I/B/E/S) actual earnings. However, we also find that some firms exclude specific recurring items aggressively. Overall, the results suggest that while regulation has generally reduced aggressive non-GAAP reporting, some firms continue to disclose non-GAAP earnings numbers that could be misleading in the post-SOX regulatory environment.

Competition's impact on research and development real activities earnings management

2020 ◽  
Vol 46 (8) ◽  
pp. 1081-1099 ◽  
Author(s):  
Russell Barber ◽  
Dana Hollie
Keyword(s):  
Research And Development ◽  
Earnings Management ◽  
Probability Model ◽  
Herfindahl Index ◽  
Content Type ◽  
Short Run ◽  
Rival Firms ◽  
Earnings Targets ◽  
Linear Probability

PurposeThe purpose of this study is twofold: (1) to examine the incremental contribution of product market fluidity (P_THREAT), another measure of competition from that of the Herfindahl index (H_COMP) and (2) to examine how a research and development (R&D) real activities earnings management strategy to meet an earnings target is influenced by competition.Design/methodology/approachUsing a linear probability model, we test whether P_THREAT is incremental to the H_COMP competition measure and whether it influences the likelihood of firms using abnormally low R&D real activities earnings management to meet an earnings target.FindingsWe find that P_THREAT is incrementally informative to the commonly used Herfindahl measure of competition in predicting abnormally low R&D real activities earnings management activities. This finding is consistent with the notion of examining P_THREAT because the Herfindahl index alone may be incomplete, depending on the product makeup of a company. The negative coefficient suggests that reducing discretionary spending on R&D in the short run could have a detrimental effect on long-term profits because bypassed R&D opportunities would put firms at a disadvantage with their competitors' R&D efforts. In contrast, we find that firms are more likely to use R&D activities earnings management as a mechanism to meet an earnings target when P_THREAT is high. This suggests that when high competitive pressure exists, firms are more likely to use abnormally low R&D as a mechanism to meet an earnings target.Originality/valueWe specifically focus on R&D activities earnings management because our primary competition measure, P_THREAT, captures changes in rival firms' products relative to the firm. Because R&D is primarily what drives product change, R&D is the type of real activities earnings management that is most relevant to our competition measure. Hence, this study contributes to the literature by examining how competition influences the likelihood of firms possibly engaging in R&D activities earnings management and meeting earnings targets in the presence of P_THREAT competition.

RISK APPETITE: A HUNGER FOR THE UNKNOWN OR STRANGLEHOLD ON GROWTH?

2005 ◽  
Vol 45 (1) ◽  
pp. 203
Author(s):  
B.K. Johnson
Keyword(s):  
Oil Prices ◽  
Foreign Exchange Rates ◽  
Value Drivers ◽  
Production Variability ◽  
Risk Appetite ◽  
The Board Of Directors ◽  
Exploration And Production ◽  
Degree Of Confidence ◽  
Financial Consequences ◽  
Earnings Targets

The recent extreme volatility in the petroleum markets has introduced a level of volatile earnings for exploration and production companies (E&P) that has not been seen since the Gulf war in 1990–91. Many companies have reduced their hedging activity to increase exposure to rising oil prices and have consequently benefitted considerably. Rapid increases in oil prices historically have been followed by just as rapid decreases. Although oil prices are a key value driver for E&P companies so is exploration and development success, production variability, operational management, and, for companies who do not report in $US, foreign exchange rates. All these value drivers contribute to top line revenues and earnings so hedging oil price in isolation from other value drivers can have adverse financial consequences. The quarterly focus by investors of listed companies on meeting earnings targets/guidance creates the pressure for the board of directors of E&P companies to focus on the degree of earnings stability that is acceptable to the market. This is reflected by a company’s aversion to risk, or risk appetite. The collective management of the value drivers as a portfolio of risks allows companies to understand the potential for earnings variance, or earnings at risk during reporting periods. This, in turn, can provide companies with a degree of confidence in meeting earnings targets and the opportunity for companies to increase their transparency in terms of disclosure/communication of how effectively it is managing core value drivers of the business.

Expectations Management

2016 ◽  
Vol 92 (5) ◽  
pp. 227-246 ◽  
Author(s):  
Tsahi Versano ◽  
Brett Trueman
Keyword(s):  
Management Strategy ◽  
Earnings Forecasts ◽  
Private Communication ◽  
Regulation Fair Disclosure ◽  
Fair Disclosure ◽  
Public Expectations ◽  
Expectations Management ◽  
Private And Public ◽  
Public Disclosures ◽  
Earnings Targets

ABSTRACT This paper analyzes a manager's optimal expectations management strategy in a setting in which the manager provides forecast guidance to an analyst both privately and publicly. Conventional wisdom suggests that managers use private communications with analysts and public earnings forecasts interchangeably to guide analysts' earnings forecasts downward toward lower earnings targets. Our analysis shows that in markets with rational investors, private and public guidance play very different roles in managing expectations, and that managers benefit from downward guidance only in their private communication with analysts. In their public forecasts, they benefit from introducing an upward bias. We explore how the effectiveness of the private and public channels in communicating information to analysts affects managers' incentive to engage in expectations management, and provide a number of empirical predictions. Among other results, we show how reducing private communication between managers and analysts (through means such as Regulation Fair Disclosure) can increase price efficiency, weaken managers' motivation to engage in private, as well as public, expectations management, and increase managers' motivation to provide public disclosures.

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