2014
DOI: 10.1111/acfi.12077
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Overvalued equity, benchmark beating and unexpected accruals

Abstract: We investigate the extent to which the overvaluation hypothesis provides incentives for managers to beat earnings benchmarks, and whether this benchmark beating can be reliably interpreted as evidence of earnings management. We carefully identify firms immediately above earnings benchmarks that have a priori, overvaluation-based incentives to achieve the benchmark. We therefore focus on benchmark-beating observations where manipulation is most likely, providing a more powerful test of the existence of opportun… Show more

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Cited by 7 publications
(3 citation statements)
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“…While Holland and Ramsay (2003) find that small increases in profits and small profits around earnings thresholds are consistent with a signalling explanation, Coulton et al (2005) caution against interpreting discontinuities around null earnings and unexpected accruals as measures of earnings management. However, more recently, Coulton et al (2014) find that where the incentive for manipulation is most likely, that is, for overvalued firms that benchmark beat, there are higher unexpected accruals.…”
Section: Relevance To Practicementioning
confidence: 99%
“…While Holland and Ramsay (2003) find that small increases in profits and small profits around earnings thresholds are consistent with a signalling explanation, Coulton et al (2005) caution against interpreting discontinuities around null earnings and unexpected accruals as measures of earnings management. However, more recently, Coulton et al (2014) find that where the incentive for manipulation is most likely, that is, for overvalued firms that benchmark beat, there are higher unexpected accruals.…”
Section: Relevance To Practicementioning
confidence: 99%
“…Another stream of literature documents discontinuities in earnings distribution at various benchmarks such as zero earnings, prior earnings, analyst forecasts and rounded numbers (Burgstahler and Dichev, 1997; Degeorge et al , 1999; Carvajal et al , 2015; Coulton et al , 2015; Kent and Routledge, 2015; Thomas, 1989; Yang and Dong, 2015; Wang et al , 2010; Lee and Choi, 2016). Debate is still going on as to the causes of the discontinuities.…”
Section: Institutional Background Literature Review and Hypotheses Developmentmentioning
confidence: 99%
“…Dechow and Skinner () defined accruals management as accounting choices under GAAP that try to obscure true economic performance that does not have any direct cash flow consequences. Earnings management has also been documented based on type of the firm (distressed or healthy) (Charitou, Lambertides, & Trigeorgis, ), subject to price control regulation (Bowman & Navissi, ), change of CEO and CEO/CFO characteristics (Amir, Kallunki, & Nilsson, ; Choi, Kwak, & Choe, ; Godfrey, Mather, & Ramsay, ; Hossain & Monroe, ), and overvalued equity (Coulton, Saune, & Taylor, ). The literature on earnings management/earnings quality is vast (see Benson et al, ; Benson et al, ), and it also encompasses corporate governance (see Brown et al, for a detailed survey; Hassan, for role of AC vs. VC on corporate governance reform); hence, the focus in this article is primarily on real earnings management.…”
Section: Literature Reviewmentioning
confidence: 99%