Political Cost (Dis)Incentives for Earnings Management in Private Firms

2007 ◽  
Author(s):  
Neil W. Garrod ◽  
Pirkovic Sonja Ratej ◽  
Aljosa Valentincic
Keyword(s):  
Earnings Management ◽  
Private Firms ◽  
Political Cost

Earnings management in non-public companies: the case of for-profit hospice organizations

2017 ◽  
Vol 29 (1) ◽  
pp. 1-19
Author(s):  
Kelly Noe ◽  
Dana A. Forgione ◽  
Pamela C. Smith ◽  
Hanni Liu
Keyword(s):  
Earnings Management ◽  
Financial Statements ◽  
Accounting Earnings ◽  
Public Companies ◽  
For Profit ◽  
Management Literature ◽  
Political Cost ◽  
Accounting Earnings Management ◽  
Public Scrutiny ◽  
Cost Factors

We examine earnings management in non-publicly listed companies, with a focus on for-profit (FP) hospice organizations, and extend the accounting earnings management literature to the hospice industry. FP hospice organizations file Medicare cost reports that include complete financial statements not otherwise publicly available. Managers of FP hospice organizations have incentives to manage earnings to increase performancebased bonuses, meet or beat bond covenant requirements, or avoid public scrutiny. We find total accruals are significantly positively associated with profitability, debt, and size factors. However, discretionary accruals are significantly negatively associated with debt and size, but not profitability. Thus, monitoring and political cost factors appear to effectively mitigate earnings management in this industry sector.

Causal effects of corporate taxes on private firms' earnings management: a regression discontinuity analysis

2022 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Gaowen Kong
Keyword(s):  
Earnings Management ◽  
Regression Discontinuity ◽  
Tax Incentives ◽  
Causal Effects ◽  
Private Firms ◽  
Effective Tax Rate ◽  
Tax Collection ◽  
Content Type ◽  
Tax Rate ◽  
Earnings Information

PurposeThe authors emphasize the information role of earnings management and how it may be used to “mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers.” Specifically, the authors examine the causal effect of tax incentives on private firms' earnings management based on a corporate tax reform in China.Design/methodology/approachIn December 2001, China implemented a tax collection reform which moved the collection of corporate income taxes from the local tax bureau to the state tax bureau. This reform results in exogenous variations in the effective tax rate among similar firms established before and after 2002. The authors apply a regression discontinuity design and use the generated variation in the effective tax rate to investigate the impact of taxes on firm earnings management.FindingsThe authors find that tax reduction substantially increases private firms' incentives to manage earnings information, and such effect is particularly pronounced when tax collection intensity and government interventions are low. Further evidence shows that lower tax rates stimulate firms' investment, inventory turnover and recruitment of skilled human capital. A plausible mechanism is that private firms signal a promising outlook by managing earnings to attain greater financing and improve investment/operation levels when financial constraints are removed.Originality/valueFirst, the authors present the causal effects of tax incentives on private firm's earnings management, which deepens the authors’ understanding on the determinants of firm's earnings information production. Second, this study also contributes to the literature on tax-induced earnings management. Third, the authors believe that this topic offers clear policy implications and would be of particular interest to regulators.

scholarly journals The Motivation of Earnings Management Practices in Indonesia Companies: Board of Directors Perspective

2021 ◽  
Vol 58 (1) ◽  
pp. 5075-5087
Author(s):  
Abshor Marantika Et al.
Keyword(s):  
Earnings Management ◽  
Board Of Directors ◽  
Research Method ◽  
Quantitative Methods ◽  
Management Practices ◽  
Stock Exchange ◽  
Financial Statements ◽  
Manufacturing Companies ◽  
Political Cost ◽  
Debt Covenant

This study provides evidence about underlying motivation the director encouraged practice of earnings management. Directors of manufacturing companies in Indonesia was to be sample in this research whose companies are listed on the Indonesia Stock Exchange (IDX). This research explores fourth types of motivation where are bonus motivation, political motivation, debt covenant motivation, and taxation motivation. The research method carried out using quantitative methods by questionnaire. Sample study used board of directors in Indonesia Stock Exchange (IDX). Research method analyzed by multiple regression. The results of this study reveal that the four of motivations have effect on earnings management practices. The evidence also shows that the highest directors motivation for earning management is come from political cost motivation.  Then, it followed by bonus motivation, taxation motivation and debt covenant motivation. The fact is an overview the regulation condition in Indonesia plays important role in being intervention of financial statements presented by the company, while bonus motivation is also significant for young directors in conducting earnings management practices on Indonesia companies.

Earnings Management of Chemical Firms in Response to Political Costs from Environmental Legislation

1997 ◽  
Vol 12 (1) ◽  
pp. 37-65 ◽  
Author(s):  
Steven F. Cahan ◽  
Betty M. Chavis ◽  
Richard G. Elmendorf
Keyword(s):  
Earnings Management ◽  
Common Factor ◽  
Environmental Response ◽  
Chemical Waste ◽  
Cross Sectional ◽  
Hazardous Chemical ◽  
Political Costs ◽  
Earnings Response ◽  
Political Cost ◽  
Set Up

This paper examines the earnings management of chemical firms at the end of 1979 when Congress was considering legislation leading to the Comprehensive Environmental Response, Compensation, and Recovery Act of 1980. This legislation gave the U.S. government the authority to remediate hazardous chemical waste sites and set up a Superfund, funded largely by the chemical industry, to cover cleanup costs. Unlike prior studies that use single, often crude, measures of political costs, we employ seven different measures of the firms' exposure to costs arising from Superfund. Additionally, using factor analysis, we construct a composite measure of political costs. There is some evidence from time-series tests that chemical firms took income-decreasing accruals in 1979 at the height of the Superfund debate but, as expected, they did not in the prior or preceding year. Cross-sectional tests show that the size of the earnings response is correlated negatively with four of the seven individual proxies for political costs. Also, the common factor for political cost is related significantly to the earnings response. Overall, the evidence is consistent with the political cost hypothesis.

Political costs and earnings management: evidence from Tunisia

2016 ◽  
Vol 6 (4) ◽  
pp. 388-407 ◽  
Author(s):  
Mouna Ben Rejeb Attia ◽  
Naima Lassoued ◽  
Anis Attia
Keyword(s):  
Earnings Management ◽  
Emerging Economies ◽  
Management Practices ◽  
Political Influence ◽  
The Political ◽  
Political Connection ◽  
State Control ◽  
Content Type ◽  
Political Costs ◽  
Political Cost

Purpose The purpose of this paper is to test the political costs hypothesis in emerging economies characterized by interventionist governments and weak protection of property rights. The paper uses executives’ political connection and state control to measure firms’ political costs. Design/methodology/approach Based on a sample of Tunisian firms, univariate and multivariate analyses are used to test whether firms’ political costs have any impact on earnings management. Findings The empirical analysis indicates that the executives’ political connection is not directly related to earnings management. However, the interaction between executives’ political connection and the state control affects the firm’s sensitivity to political pressure and its earnings management practices. More specifically, this study provides evidence that non-connected firms and state-controlled firms attempt to use accounting policies to decrease their earnings especially during periods of the former government when they had to face high political costs. This finding is robust to comparing means of political cost indicators between different groups. Indeed, private firms with political connection enjoy a significantly lower insurance right, tax and donations and grants compared to other firms. Research limitations/implications This study provides empirical evidence for the specific application of accounting theory in emerging economies. Practical implications Political influence may be an important criterion that will be used by auditors and investors to appreciate and detect specific manipulations of accounting earnings. Similarly, regulators should be aware of the political factors effect on discretionary behavior of managers to provide appropriate rules and standards. Originality/value The study is a pioneer in proving that a firm’s size is not always a suitable measure of its political cost. It extends the accounting literature on the role of political economy in the application of the political costs hypothesis. This hypothesis is confirmed in emerging economies by providing new and significantly measure of firms’ political costs

Real earnings management in public vs private firms in the GCC countries: a risk perspective

2017 ◽  
Vol 18 (2) ◽  
pp. 242-260 ◽  
Author(s):  
Khalid Al-Amri ◽  
Saif Al Shidi ◽  
Munther Al Busaidi ◽  
Serkan Akguc
Keyword(s):  
Earnings Management ◽  
Real Earnings Management ◽  
Private Firms ◽  
Flow Management ◽  
Public And Private ◽  
Content Type ◽  
Public Firms ◽  
Cash Flow Management ◽  
Gcc Countries ◽  
Private And Public

Purpose The purpose of this paper is to examine the use of real earnings management by private and public firms in a unique institutional setting, which is the Gulf Cooperation Council (GCC) countries. The paper also compares the level of real earnings management between public and private firms in the GCC area. Design/methodology/approach The GCC area is a unique setting to investigate the use of real earnings management because of the low enforcement of reporting standards and supervisory rules, lack of sophisticated financial analysis, specialized media tools and high concentration of capital ownership. The authors use different models of real earnings management proposed by Roychowdhury, 2006, cash flow management, productions cost management and discretionary expenses management to examine the use of real earnings management. Findings The paper documents evidence consistent with private and public firms using real earnings management to influence their earnings figures. The paper also shows that the level of real earnings management is higher for private firms compared to public firms when cash flow management and discretionary expenses management models are used. The production cost model results show evidence consistent with public firms only engaging in real earnings management through production cost reduction. Research limitations/implications The results of this study might not be applicable to other emerging markets. Practical implications The findings of this study should promote a general understanding of firms’ behavior in unique environment such as GCC countries. Regulators in the GCC region should be aware that real earnings management techniques have been used by firms and that extra caution is required when auditing or analyzing the financial information of private and public firms in the GCC market. Originality/value This paper contributes to the literature in many aspects. First, it provides additional evidence on the use of earnings management in unique market contexts outside the USA and Europe. The GCC markets share many common characteristics that make them interesting settings to be investigated. Second, this paper adds more evidence on the use of earnings management between public and private firms. In this regard, the paper adds additional evidence in the discussions proposed by Ball and Shivakumar (2005) and Givoly et al. (2010) who use two competing perspectives to investigate earnings quality in public and private firms: the demand hypothesis and the opportunistic behavior hypothesis.

Earnings management and performance of management buyouts

2019 ◽  
Vol 45 (10/11) ◽  
pp. 1363-1381
Author(s):  
Lokman Tutuncu
Keyword(s):  
Earnings Management ◽  
Private Equity ◽  
Discretionary Accruals ◽  
Private Firm ◽  
Private Firms ◽  
Cross Sectional ◽  
Content Type ◽  
Management Buyouts ◽  
Firm Management ◽  
And Performance

Purpose The purpose of this paper is to examine the effect of pre-acquisition earnings management on the performance of private firm management buyouts. Design/methodology/approach The study examines 291 UK private firms acquired by their managers between 2004 and 2012. Earnings management is investigated by means of cross-sectional discretionary accruals models, and estimated discretionary accruals are regressed on performance changes in the three years following acquisition. Findings Management buyouts of private firms are preceded by earnings overstatement and followed by performance deterioration. Private equity sponsored firms engage less in earnings management and remain more profitable than non-sponsored buyouts. Upward earnings managers cease to outperform industry after second post-buyout year, while aggressive earnings managers do not outperform industry at all. Discretionary total accruals are inversely associated with performance changes in the three years after buyout, and explain over 4 per cent of the changes in performance. Research limitations/implications Pertinent to the utilisation of private firms and their exemption from publishing cash flow statement, the study relies on accrual-based models for tests of earnings management. Originality/value The paper contributes to the mergers and acquisitions literature and value creation debate in buyouts by providing the first tests of earnings management and post-acquisition performance in private firm management buyouts.

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