Earnings Management and Corporate Investment Decisions

Julio, Brandon; Yook, Youngsuk

doi:10.17016/feds.2016.086

Cited by 6 publications

(4 citation statements)

References 31 publications

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“…Baggs and Bettignies (2007) show that competition improves the companies level on quality matters, cost reduction, contractual incentives and employee effort, consistent with the argument that product market competition serves to adjust the interests of shareholders and managers. Another line of study about corporate investment decision in recent years presented by Julio and Yook (2016) investigates the relationship between earnings management and the efficiency of corporate investment decisions. They show that earnings management exhibits a concave relationship with the investment sensitivity to investment opportunities as measured by Tobin’s Q.…”

Section: Theoretical Framework and Hypothesis Developmentmentioning

confidence: 99%

The effect of managerial ability on product market competition and corporate investment decisions

Salehi

Gah

Akbari

2020

JIABR

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Purpose This study aims to examine the effect of managerial ability on product market competition and corporate investment decisions, specifically, on risk-taking and investment efficiency. Design/methodology/approach The primary measure of managerial ability is Demerjian et al. model. In this study, Herfindahl–Hirschman Index is used to measure product market competition. Regression analysis is used to examine the association between corporate risk-taking and over-investment of free cash flow and product market competition and managerial ability. Findings Using firm-year observations from 2011 to 2015, the paper findings suggest that competition discourages managers to invest in risky investment. The study also found that managerial ability has no effect on the association between product market competition and investment decision. Originality/value The current study almost is the first study which is conducted on this subject; the results may give strength to further studies.

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Section: Theoretical Framework and Hypothesis Developmentmentioning

confidence: 99%

The effect of managerial ability on product market competition and corporate investment decisions

Salehi

Gah

Akbari

2020

JIABR

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“…Similarly, Tang (2007) states that firms' investment level is higher with the most aggressive accounting practices. However, Julio and Yook (2016) make similar but a little different conclusion between the firms' earnings management and subsequent investment decision. They argue that a moderate level of earnings management improves firms' corporate investment decisions while an excessive amount unwraps the benefit of earnings management.…”

Section: Earnings Management and Labor Productivity Gap With Endogeneitymentioning

confidence: 86%

Is Earnings Management Related to Labor Productivity Gap? Evidence from the USA

Bhuyan

Hasan

2022

JRFM

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Using a standard partial adjustment model and US firms, we study the relationship between managers’ failure to achieve target labor productivity and their tendency to manage earnings. To overcome the endogeneity problem, we employ an instrumental variable technique based on negative investment growth and find that managers, experiencing a labor productivity gap, tend to manage earnings by manipulating discretionary accruals and real operating activities. Additional analysis suggests that elements of personal value maximization biases drive the estimated effect of the labor productivity gap. Our results are robust considering variation and alternative measures of statistical sensitivity. The positive association between the labor productivity gap and earnings management is also consistent with the opportunistic financial reporting hypothesis and impression management theory.

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“…Real earnings management, where managers exhibit negative behavior such as reducing R&D expenditure or change the timing of long-term asset sale have a negative effect on future operating performance (Gunny, 2010). Excessive earnings management decreases investment efficiency and the allocation of resources ( Julio and Yook, 2016). The complexity of the annual report also increases when there is significant opportunity for earnings management (Lo et al, 2017).…”

Section: Earnings Management and Director Interlocksmentioning

confidence: 99%

Director interlocks and cross-cultural impact on strategies affecting shareholder–creditor conflicts

Ramaswamy

2019

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Purpose Director interlocks, with their extended resources and shared experiences, have the potential power to go beyond the basic role of providing advice and monitoring the activities of an organization. Interlocked directors can have a cross-cultural role in manipulating corporate choices and strategies in several areas, including capital structure, based on learned behavior in their internal company. Shareholders and creditors are the two main capital providers for a company. However, their risk return horizons are very different, and policies that benefit one group may not be optimal to the other. Interlocks can act as carriers of sub-par practices that affect the behavior of several organizations. Such transactional and relational activities may increase short-term value for equity shareholders, but increase the risk for the creditors. The purpose of this paper is to examine cross-cultural effects of interlocks on corporate strategies that affect this essential agency relationship. Design/methodology/approach This paper surveys the extant literature on board interlocks, board practices, equity valuation and credit risk to develop a link between such interlocks and creditor protection. Based on a brief survey of the central concepts of governance and the role of directors, this paper then provides various propositions on the role of interlocking directorships and their effect on the shareholder–creditor agency problem. Findings Director interlocks, through their linked common practices, have the potential to increase or worsen shareholder–creditor conflicts by magnifying strategic practices like short-termism, earnings management or through its effects on chief executive officer compensation. Such cross-cultural effects persist across ownership structures and cultural differences in governance. Research limitations/implications The paper is not an empirical study of the conflict. This paper uses a literature review to arrive at propositions that may impact shareholder–creditor conflicts. Practical implications Several studies have shown cronyism and the dense corporate network has been a large factor in the financial crisis that affected both shareholders and creditors. As the influence of creditors grows with the current availability, and therefore increase in debt levels, this conflict can be magnified through homophily inherent in interlocks. For an organization to be successful in its role of protecting all stakeholders, especially the two major providers of equity capital, factors that cause conflicts must be taken into account while developing the tenets of governance policies and, on a regular basis, during the strategic planning process within the organization. Regulations affecting interlocks, including governance policies, must therefore take into account such influences. Social implications Board interlocks act as channels of information between companies, creating a social network where processes and polices are shared and implemented as defined by the concept of homophily. Such management actions reduce both the quality of information available to creditors and their monitoring capabilities. This juxtaposition of shareholder and creditor interest can, therefore, be worsened by director interlocks. Originality/value Prior literature has not specifically linked director interlocks and their mutual impact on the culture and strategy of linked corporations to the shareholder–creditor conflict.

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Earnings Management and Corporate Investment Decisions

Cited by 6 publications

References 31 publications

The effect of managerial ability on product market competition and corporate investment decisions

The effect of managerial ability on product market competition and corporate investment decisions

Is Earnings Management Related to Labor Productivity Gap? Evidence from the USA

Director interlocks and cross-cultural impact on strategies affecting shareholder–creditor conflicts

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