Earnings Management and Investor Protection: An International Comparison

The corporate information environment develops endogenously as a consequence of information asymmetries and agency problems between investors, entrepreneurs, and managers. We provide a framework for analyzing the three main decisions that shape the corporate information environment in a capital markets setting: (1) managers’ voluntary reporting and disclosure decisions, (2) reporting and disclosures mandated by regulators, and (3) reporting decisions by third-party intermediaries (analysts). We review current research on disclosure regulation, information intermediaries, and the determinants and economic consequences of corporate disclosure and financial reporting decisions. We conclude that in the last ten years, research has generated a number of useful insights. Despite this progress, we call for researchers to consider interdependencies between the various decisions that shape the corporate information environment and highlight changes in the economic financial environment that raise new and interesting issues for researchers to address.

The Financial Reporting Environment: Review of the Recent Literature

統計年鑑 = Statistical yearbook

Abstract This paper addresses the question whether voluntary adoption of International Financial Reporting Standards (IFRS) is associated with lower earnings management. Ball et al. (Journal of Accounting and Economics, 36(1–3), pp. 235–270, 2003) argue that adopting high quality standards might be a necessary condition for high quality information, but not necessarily a sufficient one. In Germany, a code-law country with low investor protection rights, a relatively large number of companies have chosen to voluntarily adopt IFRS prior to 2005. We investigate whether German companies that have adopted IFRS engage significantly less in earnings management compared to German companies reporting under German generally accepted accounting principles (GAAP), while controlling for other differences in earnings management incentives. Our sample, consisting of German listed companies, contains 636 firm-year observations relating to the period 1999–2001. Our results suggest that IFRS-adopters do not present different earnings management behavior compared to companies reporting under German GAAP. These findings contribute to the current debate on whether high quality standards are sufficient and effective in countries with weak investor protection rights. They indicate that voluntary adopters of IFRS in Germany cannot be associated with lower earnings management.

Earnings Management underGerman GAAP versus IFRS

Most executives know that how they respond to the challenge of sustainability will profoundly affect the competitiveness—and perhaps even the survival—of their organizations. Yet most are flailing around, launching a hodgepodge o f initiatives without any over arching vision or plan. That’s not because they don’t s e e sustainability as a s t ra tegic issue. Rather, it’s because t h e y think t h e y ’ r e facing an unprecedented journey fo r which there is no road map. But there is a road map. Our research into the forces that have shaped the competitive landscape in recent decades reveals that ―business megatrends‖ have features and trajectories in common. Sustainability is an emerging megatrend, and thus its course is to some extent predictable. Understanding how firms won in prior megatrends can help executives craft the strategies and systems they’ll need to gain advantage in this one. The concept of megatrends is not new, of course. Businessman and author John Naisbitt popularized the term in his 1982 best seller of the same name, referring to incipient societal and economic shifts such as globalization, the rise of the information society, and the move from hierarchical organizations to networks. Our focus is on business megatrends, which force fundamental and persistent shifts in how companies compete. Such transformations arise from technological innovation or from new ways of doing business, and many factors can launch or magnify the process of change. Business megatrends may emerge from or be accelerated by financial crises, shifts in the social realities that define the marketplace, or the threat of conflict over resources. The geopolitics of the Cold War, for example, drove the innovations that launched both the space race and rapid developments in the field of microelectronics—ultimately unleashing the information technology megatrend. Electrification, the rise of mass production, and globalization were also megatrends, as was the quality movement of the 1970s and 1980s. The common thread among them is that they presented inescapable strategic imperatives for corporate leaders.

The Sustainability Imperative

Purpose – The purpose of this paper is to empirically investigate the impact of capital structure choice on firm performance in Egypt as one of emerging or transition economies.Design/methodology/approach – Multiple regression analysis is used in the study in estimating the relationship between the leverage level and firm's performance.Findings – Using three of accounting‐based measures of financial performance (i.e. return on equity (ROE), return on assets (ROA), and gross profit margin), and based on a sample of non‐financial Egyptian listed firms from 1997 to 2005 the results reveal that capital structure choice decision, in general terms, has a weak‐to‐no impact on firm's performance.Originality/value – This is the first study that examines the relationship between leverage level and firm performance in Egypt.

The impact of capital‐structure choice on firm performance: empirical evidence from Egypt

Purpose – The purpose of this paper is to examine the comparative abilities of current period cash flows and earnings (and its components) to predict one‐year‐ahead cash flow from operations in Egypt.Design/methodology/approach – The study uses the cash flow prediction models developed by Barth, Cram, and Nelson to examine the predictive abilities of earnings and cash flows for future cash flows. The first set of prediction models uses cross‐sectional regression to compare the predictive abilities of cash flows and aggregate earnings for one‐year‐ahead cash flow from operations. The second set of prediction models tests whether disaggregating earnings into cash flows and the major components of accruals enhances the predictive ability of earnings for one‐year‐ahead cash flow from operations.Findings – The findings of the study reveal that aggregate earnings have superior predictive ability than cash flows for future cash flows. Also, the results reveal that disaggregating accruals into major components – ...

Accruals and the prediction of future cash flows

Purpose – The purpose of this paper is to explore the nature and characteristics of internal audit function in Egyptian listed firms and assess its ability to fulfill its role in corporate governance.Design/methodology/approach – The study has been carried out through a questionnaire survey that aims to explore the internal audit function in Egyptian listed firms from four main aspects: insourcing or outsourcing arrangements of the internal audit function; organizational setting; activities; and interaction with external auditors.Findings – The findings of the study reveal that a large proportion of Egyptian listed firms have internal audit function, but internal audit function in these firms is less matured. Internal audit function has low levels of organizational independence, management support, and qualification of internal audit staff. Also, the results reveal that internal audit function is still focused on financial audit and internal controls compliance and has not yet moved towards the expanded n...

Internal audit function: an exploratory study from Egyptian listed firms

Purpose – The purpose of this paper is to examine the impact of corporate governance practices on auditors' decisions (judgments), especially, the client acceptance decision in Egypt, where corporate governance is neither mandatory nor legally binding.Design/methodology/approach – The study was carried out through a 2×2 experimental design with a strong level of corporate governance (the board of directors and audit committee) versus a weak level of corporate governance (the board of directors and audit committee).Findings – The findings of the study revealed that strong corporate governance is associated with more favorable acceptance judgments than weak corporate governance. These results suggest that the voluntary adoption of corporate governance practices by Egyptian companies enhances the quality of financial reporting process and, therefore, affects auditors' decisions (judgments).Research limitations/implications – The results of the study should be considered by regulators in Egypt in order to beg...

Corporate governance practices and auditor's client acceptance decision: empirical evidence from Egypt

Purpose – The purpose of this paper is to examine and compare the relative and incremental value‐relevance of a comprehensive set of accounting‐based measures of firm's performance in the emerging capital market of Egypt.Design/methodology/approach – The regression models are estimated using OLS to investigate the relative and incremental value relevance of accounting‐based performance measures. The relative value relevance tests are used to examine which performance measures better explain stock returns. The study also uses the incremental value relevance tests to examine whether one of these measures provides value‐relevance data beyond that provided by another.Findings – The results of the empirical tests indicate that relative and incremental value relevance tend to increase when moving down in the income statement, with net income having the largest relative and incremental value relevance while total sales have the lowest relative and incremental value relevance. Also, all of the accrual‐based perfo...

Ibrahim El-Sayed Ebaid

Papers

The impact of capital‐structure choice on firm performance: empirical evidence from Egypt

Accruals and the prediction of future cash flows

Internal audit function: an exploratory study from Egyptian listed firms

Corporate governance practices and auditor's client acceptance decision: empirical evidence from Egypt

The value relevance of accounting‐based performance measures in emerging economies