Differences in Stock Price Sensitivity to Accounting Information : Implications for Creative Accounting
DOI:
https://doi.org/10.17010/ijf/2016/v10i11/104915Keywords:
Value Relevance
, Creative Accounting, Stock Price Sensitivity, Accounting Information, Forensic Accounting, Earnings Management, Discretionary Accruals, Generalised Least Squares Method, Firm LevelC3
, G3, M41Paper Submission Date
, December 11, 2015, Paper sent back for Revision, May 6, 2016, Paper Acceptance Date, September 2, 2016.Abstract
Purpose/Objective: This paper is an attempt to re-visit the concept of value relevance of accounting information to draw implications for creative accounting. It explores the hypothesis that value relevance, of various accounting variables, varies depending upon the business sector to which the firm belongs.
Design/Methodology/Approach: This paper verified the above objective in the Indian context for firms in the BSE SENSEX using annual data for the period from 2000-2013 and generalised least squares regressions in the log-log form, with stock prices as dependent variables and the contemporaneous BSE SENSEX as the control variable. Book value of equity, revenue, profits after tax, and dividend were the chosen accounting items whose value relevance was examined (independent variables). Sector wise, cross sectional regression analysis was performed. To examine the significance of each of the independent variables on the stock price, univariate regressions were undertaken.
Findings: The regression results indicated that the value relevance of the chosen accounting variables varied depending on the business sector. While profits after tax significantly influenced the stocks of all chosen sectors except for automobile ; additionally, revenues in the case of IT and FMCG and book value of equity in the banking sector influenced the prices of their stock prices. In the case of automobiles, 'revenues' is the only significant explanatory variable of stock price.
Originality/Value : This paper adds a new dimension to the literature of creative accounting. It suggests that the choice of the creative accounting variable might depend on the business sector to which the firm belongs to create the desired positive impact on the stock price.
Downloads
Downloads
Published
How to Cite
Issue
Section
References
Adrian G., Ramona, R. P., & Romulus, B. S. (2011). Study regarding the influence of Romanian accounting regulations on creative accounting techniques. The Annals of the University of Oradea, Economic Science Series, 1 (2), 523-528.
Aerts, W. A., & Zhang, S. (2014). Management's causal reasoning on performance and earnings management. European Management Journal, 32 (5), 770-783. DOI: 10.1016/j.emj.2013.12.006
Ahmed, H., & Azim, M. (2015). Earnings management behavior : A study on the cement industry of Bangladesh. International Journal of Management, Accounting and Economics, 2 (4), 265 - 276.
Al-Beraidi, A., & Rickards, T. (2006). Rethinking creativity in the accounting profession: To be professional and creative. Journal of Accounting & Organizational Change, 2 (1), 25 - 41.
Alves, C. F., & Vicente, E. F. R. (2013). Does the Latin model of corporate governance perform worse than other models in preventing earnings management? Applied Financial Economics, 23 (21), 1663-1673. DOI: 10.1080/09603107.2013.844322
Athanasakou, V., Strong, N. C., & Walker, M. (2011). The market reward for achieving analyst earnings expectations : Does managing expectations or earnings matter? Journal of Business Finance & Accounting, 38 (1/2), 58-94. DOI: 10.1111/j.1468-5957.2010.02219
Baralexis, S. (2004). Creative accounting in small advancing countries: The Greek case. Managerial Auditing Journal, 19(3), 440 - 461.
Barnea, A., Ronen, J., & Sadan, S. (1976). Classificatory smoothing of income with extraordinary items. The Accounting Review, 51(1), 110-122.
Barth, M. E., Beaver, W.H., & Landsman, W. R. (1998). Relative valuation roles of equity book value and net income as a function of financial health. Journal of Accounting and Economics, 25 (1), 1-34.
Bar-Yosef, S., & Prencipe, A. (2013). The impact of corporate governance and earnings management on stock market liquidity in a highly concentrated ownership capital market. Journal of Accounting, Auditing & Finance, 28 (3), 292-316. DOI: 10.1177/0148558X13492591
Bauman, C.C., Bauman, M.P., & Hasley, R. F. (2000). Do firms use the deferred tax asset valuation allowance to manage earnings ? DOI: http://dx.doi.org/10.2139/ssrn.239054
Bernard, V. L. (1994). Accounting-based valuation methods, determinants of market-to-book ratios, and implications for financial statement analysis. Retrieved from https://deepblue.lib.umich.edu/bitstream/handle/2027.42/35398/b2014415.0001.001.pdf?sequence= 2&isAllowed=y
Byun, S., & Roland - Luttecke, K. (2014). Meeting-or-beating, earnings management, and investor sensitivity after the scandals. Accounting Horizons, 28 (4), 847-867. DOI: 10.2308/acch-50822
Campa, D., & Donnelly, R. (2014). An assessment of corporate governance reforms in Italy based on a comparative analysis of earnings management. Corporate Governance: The International Journal of Effective Board Performance, 14 (3), 407- 423. DOI: 10.1108/CG-06-2012-0048
Chen, F. - H., Chi, D. - J., & Wang, Y. - C. (2015). Detecting biotechnology industry's earnings management using Bayesian network, principal component analysis, back propagation neural network, and decision tree. Economic Modelling, 46 (April), 1- 10. DOI: 10.1016/j.econmod.2014.12.035
Chen, S. Y., Wang, Y., & Zhao, Z. (2009). Regulatory incentives for earnings management through asset impairment reversals in China. Journal of Accounting, Auditing & Finance, 24 (4), 589-620.
Cheung, Y. - L., Luo, X., Tan, W., & Xiao, T. (2014). Management earnings forecasts, earnings announcements, and institutional trading in China. Emerging Markets Finance & Trade, 50(6), 184 - 203. DOI: 10.1080/1540496X.2014.1013858
Collins, D. W., Maydew, E. L., & Weiss, I. S. (1997). Changes in the value-relevance of earnings and book values over the past forty years. Journal of Accounting and Economics, 24 (1), 39 - 67.
Creative accounting in listed companies: Independent directors have failed to protect minority shareholders. (2015, April 17). Livemint. Retrieved from http://www.livemint.com/Opinion/RhfNpXDV2dkAplQzE4POlO/Creative-accounting-in-listedcompanies.html
Damodaran, A. (2007). Valuation approaches and metrics: A survey of the theory and evidence. Foundations and Trends in Finance, 1 (8), 693-784. DOI : http://dx.doi.org/10.1561/0500000013
Daniel, N. D., Denis, D.J., & Naveen, L. (2007). Do firms manage earnings to meet dividend thresholds? Journal of Accounting and Economics, 45, 2-26. doi:10.1016/j.jacceco.2007.11.002
Das, S., Kim, K., & Patro, S. (2011). An analysis of managerial use and market consequences of earnings management and expectation management. Accounting Review, 86 (6), 1935-1967. DOI: 10.2308/accr-10128
Dimitropoulos, P.E., & Asteriou, D. (2009). The value relevance of financial statements and their impact on stock prices, evidence from Greece. Managerial Auditing Journal, 24 (3), 248-265.
Donwa, P. A., & Odia, J. O. (2013). Corporate governance, regulatory agency and creative accounting in Nigeria. Franklin Business & Law Journal, 2, 32-60.
Duhigg, C., & Kocieniewski, D. (2012, April 28). How Apple sidesteps billions in taxes. The New York Times. Retrieved from http://www.nytimes.com/2012/04/29/business/apples-tax-strategy-aims-at-low-taxstatesand-nations.html?_r=0
Dye, R. A. (1988). Earnings management in an overlapping generations model. Journal of Accounting Research, 26 (2), 195-235.
Edwards, E.O., & Bell, P. W. (1961). The theory and measurement of business income. Berkeley, CA : University of California Press.
Elisabeta, B. D., Lucian, C., Teodora, M. I., & Victoria, B. (2014).Accounting manipulation : An empirical study regarding managers' behaviour. Annals of the University of Oradea, Economic Science Series, 23(1), 554-562.
Fard, M. M., Maimand, M. E., & Moradi, M. (2014). Relationships between firm specific factors and management's preferences for an earnings threshold. Journal of Financial Accounting Research, 6(1), 75-88.
Healy, P. M., & Wahlen, J. M. (1999).A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13(4), 365 - 383.
Hunt A., Moyer, S.E., & Shevlin, T. (2000). Earnings volatility, earnings management, and equity value. Retrieved from academic.research.microsoft.com/Paper/5617383.aspx
Jha, A. (2013). Earnings management around debt-covenant violations : An empirical investigation using a large sample of quarterly data. Journal of Accounting, Auditing & Finance, 28(4), 369-396. DOI: 10.1177/0148558X13505597
Jin, J. Y. (2013). Investor attention and earnings management around the world. Accounting Perspectives, 12(2), 165187. DOI: 10.1111/1911-3838.12013
Kao, H- S. (2014). The relationships between IFRS, earnings losses threshold and earnings management. Journal of Chinese Economic & Business Studies, 12(1), 81-98. DOI: 10.1080/14765284.2013.875289
Kaplan, R. S. (1983). Measuring manufacturing performance: A new challenge for managerial accounting research. USA : Springer.
Ke, B. (2005). Do equity-based incentives induce CEOs to manage earnings to report strings of consecutive earnings increases? DOI: http://dx.doi.org/10.2139/ssrn.446540
Koch, T.W., & Wall, L.D. (2000). The use of accruals to manage reported earnings: Theory and evidence (Working Paper 2000-23). Federal Reserve Bank of Atlanta. Retrieved from https://www.frbatlanta.org//media/Documents/filelegacydocs/wp0023.pdf
Lee, K.W., Lev, B., & Yeo, G. (2007). Organizational structure and earnings management. Journal of Accounting, Auditing & Finance, 22(2), 293-331.
Liang, P. J. (2004). Equilibrium earnings management, incentive contracts, and accounting standards. Contemporary Accounting Research, 21(3), 685-717.
Liu, A. Z. (2014). Can external monitoring affect corporate financial reporting and disclosure? Evidence from earnings and expectations management. Accounting Horizons, 28(3), 529 - 559. DOI: 10.2308/acch50771
Malhotra, A.K. (2013). Curbing creative accounting : Role and effectiveness of ethics. International Journal of Finance and Policy Analysis, 5 (2), 15-26.
Mariana, S. (2015). Creating or destroying value through mergers and acquisitions? Annals of Faculty of Economics, 1 (1), 593-600.
Modum, U., Ugwoke, R.O., Onyeanu, E.O., Modebe, N.J., Kodjo, S.N., & Odoh, L.C. (2014). The effect of creative accounting on audit failure: The case of manufacturing companies quoted on the Nigerian Stock Exchange. Journal of Accounting and Financial Research (IJAFMR), 4(1), 9-14.
Moreira, J., & Pope, P. (2007). Earnings management to avoid losses : A cost of debt explanation. Working Papers (FEP)-- Universidade do Porto. Issue 145,pp.1-44. Retrieved from http://www.fep.up.pt/investigacao/cete/papers/DP0704.pdf
Naser, K. (1993). Creative financial accounting: Its nature and use. London : Prentice Hall.
Nelson, M. W., Krische, S. D., & Bloomfield, R. J. (2003). Confidence and investors' reliance on disciplined trading strategies. Journal of Accounting Research, 41(3), 503-523.
Njogu, L., Gekara, M., Waititu, A., & Omido, K. (2014). Effect of executive compensation on creative accounting among listed manufacturing companies in Kenya. Prime Journal of Social Science (PJSS), 3 (1), 552556.
Ohlson, J. A. (1991). The theory of value and earnings, and an introduction to the Ball - Brown analysis. Contemporary Accounting Research, 8(1), 1-19.
Patro, B., & Pattanayak, J.K. (2014). Detecting earnings management using accrual-based models: An empirical study with reference to Coal India Ltd. IUP Journal of Accounting Research & Audit Practices, 13(2), 53-64.
Rangone, A. (1997). Linking organizational effectiveness, key success factors and performance measures: An analytical framework. Management Accounting Research, 8(2), 207-219.
Rockart, J. F. (1979). Chief executives define their own data needs. Harvard Business Review, 57(2), 81-93.
Shan, Y. G. (2015). Value relevance, earnings management and corporate governance in China. Emerging Markets Review, 23 (June), 186-207. DOI: 10.1016/j.ememar.2015.04.009.
Shuto, A. (2009). Earnings management to exceed the threshold : A comparative analysis of consolidated and parentonly earnings. Journal of International Financial Management & Accounting, 20 (3), 199-239. DOI: 10.1111/j.1467-646X.2009.01031.x.
Soral, G., & Kamra, A. (2013). Creative accounting vis a vis ethics: Some case studies from India and Abroad. Indian Journal of Accounting, XLV(1), 20-31.
Spellman, J.D .(2012, December 16). Bad governance to blame for creative accounting. Financial Times. Retrieved from http://www.ft.com/cms/s/0/fd30eaf2-3fa8-11e2-b0ce-00144feabdc0.html#axzz3fwH2vGWl
Stubben, S. R. (2010). Discretionary revenues as a measure of earnings management. Accounting Review, 85(2), 695717.
Toshiba accounting errors may be over $800 million - source. (2015, July 4). Reuters. Retrieved from http://in.reuters.com/article/toshiba-accounting-idINKCN0PD2FU20150704
Trotman, M. (1993). ComptabiliteBrittannique, mod d'emploi. Economica, Paris. Retrieved from EBSCO Host Journals database.
Verma, G. D. (2014). Earnings management practices in India: A study of auditor's perception. Journal of Financial Crime, 21(1), 100-110. DOI: 10.1108/JFC-09-2013-0054
Vinciguerra, B., & O'Reilly-Allen, M. (2004). An examination of factors influencing managers' and auditors' assessments of the appropriateness of an accounting treatment and earnings management intentions. American Business Review, 22(1), 78-87.
Weber, M. (2006). Sensitivity of executive wealth to stock price, corporate governance and earnings management. Review of Accounting and Finance, 5 (4), 321-354.
Wells, P. (2002). Earnings management surrounding CEO changes. Accounting & Finance, 42 (2), 169-193.
Yang, W., Hsu, J., & Yang, T. (2013). Earnings management, institutional shareholdings, and performance of SEO firms. Managerial Finance, 39(6), 528 - 549.
