Earnings Management and Investor Protection: An International Comparison

What makes organizations so similar? We contend that the engine of rationalization and bureaucratization has moved from the competitive marketplace to the state and the professions. Once a set of organizations emerges as a field, a paradox arises: rational actors make their organizations increasingly similar as they try to change them. We describe three isomorphic processes-coercive, mimetic, and normative—leading to this outcome. We then specify hypotheses about the impact of resource centralization and dependency, goal ambiguity and technical uncertainty, and professionalization and structuration on isomorphic change. Finally, we suggest implications for theories of organizations and social change.

The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields (Chinese Translation)

The Visible Hand: The Managerial Revolution in American Business

This paper is Part II in a two part series on conservatism in accounting. Part I examines alternative explanations for conservatism in accounting and their implications for accounting regulators (SEC and FASB). Part II summarizes the empirical evidence on the existence of conservatism, conservatism's increase over time and conservatism's alternative explanations. It also discusses opportunities for future research on conservatism. Conservatism is defined as the differential verifiability required for recognition of profits versus losses. In its extreme form the definition incorporates the traditional conservatism adage: "anticipate no profit, but anticipate all losses." Despite criticism from many quarters, the formal evidence suggests conservatism not only exists in modern day financial reporting, it also suggests conservatism has increased in the last 30 years The empirical literature uses a variety of conservatism measures in time-series and cross-sectional tests of contracting, shareholder litigation, taxation, and accounting regulation explanations for conservatism. The tests' results suggest the importance of all four explanations. Two non-conservatism explanations (earnings management and the abandonment option) cannot individually or jointly explain the observed systematic understatement of net assets that is the hallmark of conservatism. Researchers should note that accounting's effects on managerial behavior play a central role in the evolution of both accounting and financial reporting. Assessing the relevance of an accounting method to financial statement users' decisions requires assessing managers' abilities to use that method to manipulate accounting numbers and commit fraud. The evidence on conservatism suggests asymmetric verifiability is critical to constraining manipulation and fraud.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID438662_code030827590.pdf?abstractid=438662&rulid=11032200&mirid=4

Conservatism in Accounting - Part Ii: Evidence and Research Opportunities

This paper is Part II in a two‐part series on conservatism in accounting. Part I examined alternative explanations for conservatism in accounting and their implications for accounting regulators (SEC and FASB). Part II summarizes the empirical evidence on the existence of conservatism, conservatism's increase over time, and conservatism's alternative explanations. It also discusses opportunities for future research on conservatism. The empirical literature uses a variety of conservatism measures in time‐series and cross‐sectional tests of contracting, shareholder litigation, taxation, and accounting regulation explanations for conservatism. The tests' results suggest the importance of all four explanations. Two non‐conservatism explanations—earnings management and the abandonment option—cannot individually or jointly explain the observed systematic understatement of net assets that is the hallmark of conservatism. Researchers should note that accounting's effects on managerial behavior play a central role...

Conservatism in Accounting Part II: Evidence and Research Opportunities

We investigate whether accounting systems recognise bad news more promptly in earnings than good news, where news is proxied by changes in share price. The analysis is based on a sample of firm/years drawn from France, Germany, and the UK during 1990 to 1998. These three countries are the originators of three distinct legal traditions. Previous studies have argued that asymmetric recognition, one manifestation of conservative accounting, is sensitive to legal background and history. We find that in all three countries the contemporaneous association between earnings and returns is much stronger for bad news (i.e. when price changes are negative) than for good news, and although the results are strongest for the UK, and then France, the inter-country differences are not statistically significant. The stronger reaction to bad news is more pronounced for firms with relatively low capitalisation. We also find that the relative persistence of profits and losses are consistent with asymmetric recognition in France and the UK, but not in Germany, and that the more timely recognition of bad news is maintained even when we control for earnings persistence. When we extend the model to include price changes from previous periods, we see that the stronger reaction to bad news decays over time. The results from this model also suggest that 'pervasive' conservatism, unrelated to news, is observed in Germany and France, but the UK results are consistent with optimism. Although asymmetric recognition is generally strongest in the UK and weakest in Germany, and this broadly conforms to our expectations, the differences are less clear than the results from earlier periods

On the Asymmetric Recognition of Good and Bad News in France, Germany and the United Kingdom

During the last decade there has been a profound revolution in the information
technology by means of the Internet, and obviously accounting has been directly affected by
this change. Although the main objective of this paper is to study the use of the Internet by
Spanish companies to disclose financial information, we also discuss about the reasons of
companies to use the new technologies to communicate with interested parties and its
consequences. The empirical research is based on companies listed on the Madrid stock
exchange , we analyse not only the information provided, but also the factors that explain the
different attitudes of companies towards this vehicle for investors relationships. The results
show that size is the main factor that explains not only the quantity but also the quality of
financial information.

/pdf/the-use-of-the-internet-for-corporate-reporting-by-spanish-vlagh4qx6o.pdf

The use of the internet for corporate reporting by Spanish companies

Lobbying is an essential part of the International Accounting Standards Board (IASB) standard-setting process. There is still much to learn, however, about key aspects of the roles played and arguments employed by various constituents when lobbying practices do occur. This paper focuses on the regulation of share-based payments. As these transactions were under-regulated before International Financial Reporting Standard (IFRS) 2, we expect that the strong debate that occurred during the 1990s resulted in conflicting opinions when this standard was under discussion. To analyse lobbying behaviour and assess its influence on the IASB's decision-making, we conducted a content analysis of 539 letters addressing the documents issued by the G4+1 and the IASB preceding IFRS 2. Consistent with the rational-choice model, our analysis of lobbying activity shows that preparers constituted the most active group, particularly when the IASB started the project, whereas participation of standard-setters increased at the ...

Lobbying on Accounting Standards: Evidence from IFRS 2 on Share-Based Payments

This article provides an analysis of the ethical behavior of managers making goodwill impairment decisions following the adoption of the International Financial Reporting Standard (IFRS) 3 on Business Combinations. Replacing the systematic amortization of goodwill with the impairment-only approach has been a highly controversial step. Although the aim of IFRS 3 was to provide users with more value-relevant information regarding the underlying economics of the business, it has been criticized for the potential earnings management inherent in impairment testing. This study is based on a sample of Spanish-listed companies between 2005 and 2011, a period that embraces the economic crisis. After controlling for the underlying economic factors of the firms, the results suggest that managers are exercising discretion in the reporting of goodwill impairment losses, and big bath and smoothing strategies are influencing the decisions, whether or not to impair goodwill and about the magnitude of the impairment. Firm size is an attribute that appears significant in the analysis, suggesting that the cost and complexity of running the impairment test affect managers’ decisions. Additional analyses suggest that the macroeconomic environment influences opportunistic and unethical behaviors.

How Ethical are Managers’ Goodwill Impairment Decisions in Spanish-Listed Firms?

This paper focuses on earnings conservatism, and provides new evidence based on procedures that account for variability at the firm level, drawing a comparison between the European Union and the United States. A key finding is that the estimated responsiveness of earnings to bad news is substantially higher when unobserved firm-specific effects are modelled. Furthermore, it is shown that accounting has become more conservative not only in the U.S. but also in the EU when taken as a whole, and there is little evidence of marked differences in the asymmetric timeliness of earnings between the two. Indeed, any changes in this property of earnings are likely to be attributable to a common factor that influences firms similarly in both locations, and not necessarily to the process of economic convergence that has taken place in the EU.

Begoña Giner

Papers

On the Asymmetric Recognition of Good and Bad News in France, Germany and the United Kingdom

The use of the internet for corporate reporting by Spanish companies

Lobbying on Accounting Standards: Evidence from IFRS 2 on Share-Based Payments

How Ethical are Managers’ Goodwill Impairment Decisions in Spanish-Listed Firms?

Earnings Conservatism: Panel Data Evidence from the European Union and the United States