Managerial Discretion in Accruals and Informational Efficiency

Perotti, Pietro; Windisch, David

doi:10.1111/jbfa.12241

Cited by 18 publications

(5 citation statements)

References 158 publications

(354 reference statements)

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“…We find that stock liquidity positively interacts with takeover exposure and equity compensation in affecting earnings management. This evidence is consistent with the argument that increased stock liquidity intensifies managers' motives to manage earnings upward due to higher hostile takeover pressure and 2 For example, Perotti and Windisch (2016) document discretionary accruals, on average, convey information and improve price efficiency, which is consistent with discretionary accruals improving stock liquidity. 3 Chordia et al (2008) document that the average effective spread was 12 cents in the eighths regime, eight cents in the sixteenths regime, and three cents in the decimal regime.…”

Section: Introductionsupporting

confidence: 82%

Does Stock Liquidity Affect Accrual‐based Earnings Management?

Huang

Lao²,

McPhee³

2017

Business Fin & Account

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This study investigates the effects of stock liquidity on earnings management. While prior research finds that liquidity has mixed effects on corporate governance, our baseline regression results show that an increase in stock liquidity is associated with an increase in discretionary accruals and revenues. To establish causality, we use two quasi‐natural experiments that exploit exogenous increases in stock liquidity resulting from regulatory changes to the minimum tick size. The results of our difference‐in‐differences approach indicate that stock liquidity increases accrual‐based earnings management. Additional analysis suggests that liquidity affects earnings management by magnifying the effects of takeover pressure and equity compensation.

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Section: Introductionsupporting

confidence: 82%

Does Stock Liquidity Affect Accrual‐based Earnings Management?

Huang

Lao²,

McPhee³

2017

Business Fin & Account

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“…The explanatory power of the regression models is (on average) approximately 8.5%, which aligns with recent prior research (e.g. Hesarzadeh et al, 2020;Hesarzadeh and Rajabalizadeh, 2019;Martineau, 2018;Perotti and Windisch, 2017).…”

Section: Association Of Readability and Audit Market Competition (H1)supporting

confidence: 87%

Readability of auditor reports: does audit market competition matter? Empirical evidence from Iran

Rajabalizadeh

2023

ARA

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PurposeWhile existing research explores the impact of audit market competition on audit fees and audit quality, there is limited investigation into how competition in the audit market influences auditors' writing style. This study examines the relationship between audit market competition and the readability of audit reports in Iran, where competition is particularly intense, especially among private audit firms.Design/methodology/approachThe sample comprises 1,050 firm-year observations in Iran from 2012 to 2018. Readability measures, including the Fog index, Flesch-Reading-Ease (FRE) and Simple Measure of Gobbledygook (SMOG), are employed to assess the readability of auditors' reports. The Herfindahl–Hirschman Index (HHI) is utilized to measure audit market competition, with lower index values indicating higher auditor competition. The concentration measure is multiplied by −1 to obtain the competition measure (AudComp). Alternative readability measures, such as the Flesch–Kincaid (FK) and Automated Readability Index (ARI) are used in additional robustness tests. Data on textual features of audit reports, auditor characteristics and other control variables are manually collected from annual reports of firms listed on the Tehran Stock Exchange (TSE).FindingsThe regression analysis results indicate a significant and positive association between audit market competition and audit report readability. Furthermore, a stronger positive and significant association is observed among private audit firms, where competition is more intense compared to state audit firms. These findings remain robust when using alternative readability measures and other sensitivity checks. Additional analysis reveals that the positive effect of competition on audit report readability is more pronounced in situations where the auditor remains unchanged and the audit market size is small.Originality/valueThis paper expands the existing literature by examining the impact of audit market competition on audit report readability. It focuses on a unique audit market (Iran), where competition among audit firms is more intense than in developed countries due to the liberalization of the Iranian audit market in 2001 and the establishment of numerous private audit firms.

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“…Falkinger and Habib suggest that capital risk, the extent to which management decisions place shareholder capital at risk, plays a central role in imposing constraints rather than granting discretion [ 31 ]. Perotti and Windisch argue that future information efficiency increases with the extent to which managers exercise discretionary accruals, with discretionary accruals conveying useful information to investors and facilitating price convergence towards their fundamental value [ 32 ]. Magerakis argues that the positive relationship between CEO competence and firm cash holdings is weakened by firm-level managerial discretion, that is, managerial discretion may affect the amount of a firm's cash holdings [ 33 ].…”

Section: Literature Reviewmentioning

confidence: 99%

CEO discretion and enterprise digital transformation

Wang,

2024

Heliyon

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Managerial Discretion in Accruals and Informational Efficiency

Cited by 18 publications

References 158 publications

Does Stock Liquidity Affect Accrual‐based Earnings Management?

Does Stock Liquidity Affect Accrual‐based Earnings Management?

Readability of auditor reports: does audit market competition matter? Empirical evidence from Iran

CEO discretion and enterprise digital transformation

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