Do Firms Use Restructuring Charge Reversals to Meet Earnings Targets?

Moehrle, Stephen R.

doi:10.2308/accr.2002.77.2.397

Cited by 152 publications

(50 citation statements)

References 28 publications

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“…). Consistent with this argument, Moehrle () finds that firms that experience losses are more likely to manage earnings upwards than firms with positive net income. Given managers’ preference to delay the release of bad news, we suspect managers in areas of high gambling acceptance will be more likely to materially misreport firm performance when they are truly experiencing losses, as an attempt to buy time so that they can try to turn things around.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 88%

Gambling Attitudes and Financial Misreporting

Christensen¹,

Jones

Kenchington

2017

Contemporary Accting Res

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We investigate whether attitudes toward gambling help explain the occurrence of intentional misreporting. Similar to gambling, some financial reporting choices involve taking deliberate, speculative risks. We predict that in places where gambling is more socially acceptable, managers will be more likely to take financial reporting risks that increase the likelihood the financial statements will need to be restated. To test this prediction, we exploit geographic variation in local gambling attitudes and find that restatements due to intentional misreporting are more common in areas where gambling is more socially acceptable. This association is even stronger in situations where management is under greater pressure to misreport, including when the firm is close to meeting a performance benchmark, experiencing poor financial performance, or under investment‐related pressure. Furthermore, these results are robust to numerous tests to address omitted variables and endogeneity. Collectively, these findings suggest gambling attitudes help explain the incidence of intentional misreporting.

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Section: Literature Review and Hypothesis Developmentmentioning

confidence: 88%

Gambling Attitudes and Financial Misreporting

Christensen¹,

Jones

Kenchington

2017

Contemporary Accting Res

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“…In the first type, the study focuses on the mechanisms/tools that firms use to produce earnings that just meet or beat a target. Firms make accounting choices such as managing tax expense (Dhaliwal, Gleason, and Mills, 2004); managing the classification of items within the income statement (McVay, 2006); and managing the creation and reversal of restructuring charge accruals/cushions (Moehrle, 2002). Firms also make real decisions such as repurchasing stock (Hribar, Jenkins, and Johnson, 2006) or selling fixed assets or marketable securities (Herrmann, Inoue, and Thomas, 2003) or repurchasing shares (Bens, Nagar, Skinner, and Wong, 2003).…”

Section: Benchmarkingmentioning

confidence: 99%

Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences

Dechow¹,

2010

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Researchers have used various measures as indications of "earnings quality" including persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness, and external indicators such as restatements and SEC enforcement releases. For each measure, we discuss causes of variation in the measure as well as consequences. We reach no single conclusion on what earnings quality is because "quality" is contingent on the decision context. We also point out that the "quality" of earnings is a function of the firm's fundamental performance. The contribution of a firm's fundamental performance to its earnings quality is suggested as one area for future work. Over the years, researchers have devised various measures of "earnings quality" to represent decision usefulness in specific decision contexts. These measures, however, have become proxies for "earnings quality" in a generic sense, absent a decision context. The result is that some papers use a proxy for earnings quality that does not match the hypothesized form of decision usefulness in their study, but they nonetheless find results that are consistent with their hypothesis. Other papers are intentionally agnostic and find robust results across multiple proxies for earnings quality. The fact that researchers find consistent and robust results across proxies suggests that there is common component to the various measures of quality, which is the firm's fundamental earnings process. Existing research does not clearly distinguish the impact of a firm's fundamental earnings process on the decision usefulness ("quality") of its earnings from the impact of the application of accounting measurement to that process. Research attention has focused on earnings management that reduces the reliability of earnings rather than on the ability of specific features of an accrual-based accounting system to provide a more decision-useful measure, conditional on the firm's fundamental earnings process. September 2009Thanks to Michelle Hanlon (the editor), Shiva Rajgopal, Terry Shevlin, Nemit Shroff, Richard Sloan, and Rodrigo Verdi for helpful comments. The framework for this review is based on Schrand's discussion of earnings quality at the April 2006 CARE Conference sponsored by the Center for Accounting Research at the University of Notre Dame. *Title Page/Author Identifier Page/Abstract 1 Understanding earnings quality: A review of the proxies, their determinants and their consequencesWe begin with a definition of "earnings quality" that sets the scope of our review. Higher quality earnings more faithfully represent the features of the firm's fundamental earnings process that are relevant to a specific decision made by a specific decision-maker. Our definition implies that the term "earnings quality" is meaningless without specifying the decision context, because the relevant features of the firm's fundamental earnings process differ across decisions and decision makers. Consistent with this broad definition, we review approximately 350 published papers on e...

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“…In a third specification, we include the deviations of unadjusted earnings both from historical earnings and from the analyst forecast target. Moehrle (2002) provides evidence that firms reverse previously recorded restructuring charges to meet both analyst forecast and historical earnings targets.…”

Section: Car Vol 20 No 3 (Fall 2003)mentioning

confidence: 99%

Earnings Management Using the Valuation Allowance for Deferred Tax Assets under SFAS No. 109*

Schrand

Wong

2003

Contemporary Accting Res

201

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Statement of Financial Accounting Standards No. 109 ( SFAS No. 109 ) allows firms to use their discretion to set arbitrarily high valuation allowances against deferred tax assets. Firms can then later use these "hidden reserves" to manage earnings. Our evidence indicates that most banks do not record a valuation allowance to manage earnings, but rather to follow the guidelines of SFAS No. 109 . However, if the bank is sufficiently well capitalized to absorb the current-period impact on capital, then the amount of the valuation allowance increases with a bank's capital. In later years, bank managers adjust the valuation allowance to smooth earnings. The magnitude of the discretionary adjustment increases with the deviation of unadjusted earnings from the forecast or historical earnings. Keywords Banks; Deferred taxes; Discretion; Earnings management CondenséLes auteurs se demandent si les banques gèrent le bénéfice en constituant une provision pour moins-value élevée à l'égard des actifs d'impôts futurs ( deferred tax assets -DTA ) et en ajustant cette provision dans les exercices ultérieurs. Le Statement of Financial Accounting Standards n o 109 (SFAS 109) exige que les entreprises créent des provisions pour moinsvalue à l'égard des actifs d'impôts futurs. Au cours des exercices ultérieurs, les ajustements qui sont apportés à ces provisions sont passés en résultat, à titre d'élément de la charge totale d'impôts sur les bénéfices. Dans le cadre du débat suscité par la nouvelle norme, les analystes ont supposé que les entreprises, lorsqu'elles adoptaient le SFAS 109, pouvaient surestimer la provision pour moins-value et la radier ultérieurement, à des fins stratégiques, de façon à augmenter le bénéfice des exercices ultérieurs.Les entreprises pouvaient donc « dissimuler » la provision pour moins-value lors de l'adoption du SFAS 109, car l'ajustement cumulatif compte non tenu de la provision pour moins-value excédait, en général, le montant de la provision. Cette provision était cependant suffisamment importante pour offrir aux entreprises la possibilité de manipuler le bénéfice futur. La provision moyenne pour moins-value des banques de l'échantillon est de 0,09 $ par action (0,37 $ pour les banques de l'échantillon ayant fait état de provisions pour moins-value différentes de zéro), par rapport à un bénéfice par action total déclaré de 1,99 $, en moyenne. L'analyse porte sur un échantillon de sociétés de portefeuille bancaires faisant appel public à l'épargne (ci-après banques ). Les banques indiquent des montant considérables au titre des actifs d'impôts futurs et ont donc la possibilité de constituer de substantielles provisions pour moins-value. Leurs activités d'exploitation sont aussi relativement homogènes et elles sont sensibles aux conditions macroéconomiques. Ces facteurs renforcent le modèle des ajustements non discrétionnaires à la provision pour moins-value que proposent les auteurs.L'analyse que font les auteurs des décisions prises par les banques, au moment où elles ont adopté le SFAS 109...

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Do Firms Use Restructuring Charge Reversals to Meet Earnings Targets?

Cited by 152 publications

References 28 publications

Gambling Attitudes and Financial Misreporting

Gambling Attitudes and Financial Misreporting

Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences

Earnings Management Using the Valuation Allowance for Deferred Tax Assets under SFAS No. 109*

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