The Sale of Assets to Manage Earnings in Japan

Abstract

In this article we investigate Japanese managers’ use of income from the sale of fixed assets and marketable securities to manage earnings. The earnings management target examined is Japanese managers’ forecasts of current–year earnings. We find a negative relation between income from asset sales and management forecast error. When current reported operating income is below (above) management's forecast of operating income, firms increase (decrease) earnings through the sale of fixed assets and marketable securities. The results hold after controlling for expected future performance, debt–to–equity ratio, size, growth, and last year's income from asset sales.

The joint decision to manage earnings through discretionary accruals and asset sales around insider trading: Taiwan evidence

“…Inoue and Thomas (1996), Poitras et al (2002) and Herrmann et al (2003) indicate a positive correlation between firm size and AS. Following Herrmann et al (2003), the log of total assets (SIZE) and prior AS (AS t−1 , found to be positively correlated with AS in a current quarter) are included as the control variables.…”

“…Therefore, the ratio of debt to equity (D/E) is included as a control variable for differences in leverage. The literature also documents that growth opportunities have a significant, negative correlation with DA (Park and Park 2004) and AS (Herrmann et al 2003). In connection to previous studies, the Book-to-Market ratio (B/M) is included as a proxy for growth opportunities.…”

“…The absolute value of the shares difference between insider buying and selling (scaled by the shares outstanding at the beginning of the quarter) is included as the control variable for the size of net insider trading (IT). The literature shows that leverage has a significant, positive correlation with DA (Barton 2001) and AS (Bartov 1993;Herrmann et al 2003), presumably to avoid potential debt covenant violations. Therefore, the ratio of debt to equity (D/E) is included as a control variable for differences in leverage.…”

“…Bartov (1993) provides evidence that managing earnings through AS is either to smooth earnings or to satisfy debt covenants. Herrmann et al (2003) suggest that Japanese managers decrease earning forecast error by timing their AS. Generally, we see that the direction and magnitude effects of using DA (AS) on the accrual (cash flow) part of reported earnings are likely to be predicted by insiders.…”

The Effect of the International Accounting Standards on the Related Party Transactions Disclosure

“…Moreover, the examination of related party transactions in the US context indicates the association of related party transactions with earnings management (Gordon and Henry, 2005). Additionally, earnings management can also be used through the sales of assets (Herrmann et al, 2003).…”