The Market's Valuation of Fraudulently Reported Earnings

Hui, Kai Wai; Lennox, Clive S.; Zhang, Guochang

doi:10.1111/jbfa.12072

Cited by 12 publications

(13 citation statements)

References 45 publications

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“… Hui et al . () use this approach to estimate the likelihood of financial misstatements and show that the market assigns a lower valuation to the earnings of firms with higher likelihood of financial misstatements. Their findings suggest that investors appear to use the same information from financial statements to assess the risk of misreporting.…”

mentioning

confidence: 99%

The relationship between corporate social responsibility, financial misstatements and SEC enforcement actions

Tran

O’Sullivan

2018

Accounting & Finance

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This study explores the relationship between corporate social responsibility (CSR), financial misstatements and SEC enforcement actions. We find that firms with higher CSR are less likely to receive SEC enforcement actions for financial misstatements. Drawing on insights from stakeholder theory and the reputational literature, we identify two channels underpinning this relationship: (i) firms with higher CSR are less likely to engage in financial misstatements and (ii) the reputational effect of CSR reduces the likelihood of SEC enforcement actions. We find empirical evidence consistent with both channels.

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confidence: 99%

The relationship between corporate social responsibility, financial misstatements and SEC enforcement actions

Tran

O’Sullivan

2018

Accounting & Finance

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“…Prior research (e.g.,Hui et al, 2014) shows that fraudulent earnings numbers are discounted by the market, leading to a low ERC.C 2014 John Wiley & Sons Ltd…”

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confidence: 99%

Relationship Networks and Earnings Informativeness: Evidence from Corruption Cases

Fan¹,

Ge²,

Li³

et al. 2014

Business Fin & Account

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The measurement difficulties arising from relationship‐based business transactions can result in accounting opacity. We test this hypothesis by exploiting a natural experiment. Using a sample of firms that were networked with 45 high‐level Chinese bureaucrats involved in corruption scandals between 1996 and 2007, we examine the patterns in the earnings informativeness of these firms before and after the exogenous break of the networks. We predict that the costs and benefits of business‐politics relationships, which are not measurable by the current accounting systems, diminish the ability of accounting earnings to track a firm's economic performance. In turn, a break in a political relationship due to anti‐corruption enforcement reduces the measurement noise and improves the earnings informativeness. We find that, relative to the matched control firms, there is indeed a significant increase in the earnings informativeness of the networked firms following the public exposure of a scandal. Robustness tests fail to show that the documented improvement in the earnings informativeness is primarily due to systematic changes in the firms’ earnings management behavior or disclosure policies.

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“…Herrmann, Hope, Payne, and Thomas (2011) document a positive association between stock returns and meeting analysts' forecasts but no incrementally positive market reaction to also reporting a profit or reporting an increase in earnings. Hui, Lennox, and Zhang (2014) find that investors accord less weight to fraudulent accounting earnings, even before public disclosure of the fraud. Regarding firm value, Henry (2008) These foregone profits result in higher idiosyncratic risk and higher cost of capital.…”

Section: Tax Avoidance and Cost Of Capitalmentioning

confidence: 91%

Tax avoidance and ex ante cost of capital

Cook

Moser

Omer

2017

Business Fin & Account

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This study examines the association between tax avoidance and ex ante cost of equity capital. Based on prior research, we develop two proxies for investors’ expectations of tax avoidance and explore whether deviations from those expectations result in higher ex ante cost of equity capital. We find that the ex ante cost of equity capital increases with tax avoidance that is either below or above investor expectations and that the increase is larger for tax avoidance that exceeds investors’ expectations. We then examine whether firms that alter their future tax avoidance exhibit a lowering of their ex ante cost of equity capital and find that tax avoidance decreases (increases) from the prior year for firms that were above (below) investors’ expectations in the prior year. These results are consistent with the trade‐off suggested by the Scholes and Wolfson framework and reinforce the notion that balancing tax benefits and non‐tax costs is an important feature of firms’ tax planning.

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The Market's Valuation of Fraudulently Reported Earnings

Cited by 12 publications

References 45 publications

The relationship between corporate social responsibility, financial misstatements and SEC enforcement actions

The relationship between corporate social responsibility, financial misstatements and SEC enforcement actions

Relationship Networks and Earnings Informativeness: Evidence from Corruption Cases

Tax avoidance and ex ante cost of capital

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