In order to boost the exit value, it is not uncommon that issuers report earnings in excess of cash flow generated by its operations at the initial public offering (IPO). The discretionary activity of performing earnings management can mislead investors about the intrinsic value of the newly public firm. Within this study, I examine how earnings management will affect the stock market reaction upon the lockup expiration date, the IPO adjustable offering size, and how the backing of private equity or venture capital (PEVC) affects earnings management tendencies within IPO firms. Using a unique, hand-collected dataset of 56 Swedish newly public firms from 2007 - 2014, I show that IPO firms (i) manage their earnings at the full fiscal year prior to the IPO and that earnings management will result in a negative stock market reaction upon the lockup expiration date. More importantly, I show that (ii) high adjustable offerings do not affect this relationship indicating that earnings management has no impact on the adjustable part of the offering size within IPOs. I also find that (iii) IPO firms backed by PEVC firms are more eager to manipulate their earnings, and (iv) highly reputable PEVC firms do not mitigate the manipulation of earnings within IPO firms. The results taken together suggest that studying the stock market reaction on the lockup expiration date is important for manipulative IPO firm detection, and that a participation in IPOs backed by PEVC firms must be done with caution.

The relationship between earnings management and tax manipulation has been discussed in academia recently. We contribute to this discussion by using a list of tax evader companies, to test the relationship. The list was supplied by the Swedish Tax Agency and consists of public companies from the Swedish stock exchanges. Our findings show that tax evader companies are more prone to manage their earnings and that they do it by reporting small earnings. The effect of labelling the companies as tax manipulators does also not change the extent that they manipulate their earnings in the future. There is therefore no disciplinary effect from the tax evader fine on a manipulating company to behave more credible in the future. Out of our results the most unexpected was however that when we compare the NASDAQ companies with the ones listed on less liquid stock exchanges the NASDAQ ones were more pervasive in managing their earnings. This goes against our own hypothesis as well as previous literature and shows that investors have to be careful also when investing in premium markets.

There is an ethical dilemma and a legal issue of earnings management and insider trading, and a risk of it affecting the accuracy of financial markets. The use of earnings management leads to an information asymmetry between the corporate management and the financial markets. This paper investigates how earnings management affects insider trading and whether insider trading is a good information source about earnings quality and future performance. Studying companies believed to have conducted earnings management on Nasdaq OMX Nordic Stock Exchange (Stockholm) from 2005 through 2014 indicates that: (1) insiders do not sell shares after managing earnings upwards; (2) the relationship between insider selling and future earnings performance is positive, contradicting agency theory and previous research; (3) the market’s reaction to the earnings announcement one year after suspected earnings management is positive for firms where insiders have sold shares, and vice versa. Taken together, our results are not in line with those of previous studies conducted on other markets. This is likely to depend on the unique Swedish setting with the existence of endowment insurances, where insiders can trade shares without having to disclose their transactions to the market. Because of this, we argue that insider trading is not an adequate signal about Swedish firms’ earnings quality and future performance. We therefor further emphasize the importance of a change in the Swedish legislation, in order to insure the accuracy of financial markets and to protect other investors.

<p>Earnings management could be motivated by either managerial opportunism or efficient contracting. To discriminate between these motivations, I use a measure of product market competition that analytical research predicts will discipline managers and better align their interests with those of shareholders. Thus, if earnings management reflects managerial opportunism, then an increase in competition will decrease earnings management; and if it reflects efficient contracting, then an increase in competition will increase earnings management. Consistent with earnings management indicating managerial opportunism, I show that an increase in competition decreases real earnings management in the form of overproduction to avoid reporting negative earnings or a negative change in earnings.</p> / Dissertation

Goodwill har sedan länge varit ett kontroversiellt ämne. Genom införandet av det nya internationella regelverket IFRS kom hanteringen av goodwill att förändras. Istället för att göra årliga nedskrivningar ska nu goodwillposten hos börsnoterade företag på minst årlig basis genomgå en nedskrivningsprövning, för att se om ett nedskrivningsbehov föreligger. Detta har emellertid mottagit viss kritik, då det anses vara subjektiva bedömningar som ligger till grund. En följd av detta skulle således kunna vara att företag medvetet undviker nedskrivningar.  Kritik riktas även mot de höga goodwillposter som svenska företag redovisar. Trots den globala kris som världen har befunnit sig i sedan 2007 förefaller det som att goodwill hos svenska företag inte har påverkats i en negativ riktning. Detta kritiseras öppet av praktiserande ekonomer, samt strider mot tidigare forskning inom ämnet. Studier har funnit att makroekonomiska faktorer såsom lågkonjunktur bör leda till sänkta nivåer av goodwill, då en nedskrivning sannolikt bör vara aktuell.  För att kunna studera de fulla effekterna av en lågkonjunktur bör vidare, enligt forskning, en viss tidsfördröjning ha ägt rum. Detta åskådliggjorde ett forskningsgap över svensk ekonomi, och således något som denna uppsats ämnar fylla. Genom att studera årsredovisningar från 36 stycken svenska företag noterade på Large Cap-listan, granskades företagens andel goodwill av eget kapital. En jämförelse av goodwillposten innan lågkonjunkturen samt efter lågkonjunkturens början exekverades. För att kunna ta en eventuell effekt av en tidsfördröjning i beaktande, studerades goodwill år 2011. Ytterligare jämförelser utfördes för år 2010, 2009, 2008 och 2007 med året innan konjunkturförsämringen (som här representeras av år 2006). Detta för att undersöka om andelen goodwill i förhållande till eget kapitel minskade i ett tidigare skede av konjunkturförsämringen. Studiens resultat indikerar att de undersökta företagen inte uppvisar en lägre andel goodwill efter lågkonjunkturens början. Data visar att goodwillposten de facto var högre efter lågkonjunkturens början än innan. Detta strider mot tidigare forskning, samt är avvikande mot den trend som kan observeras i andra länder som exempelvis USA. Då även länder som USA tillämpar ett regelverk som anses vara ekvivalent med IFRS, är måhända subjektiva bedömningar av goodwillpostens värde otillräckligt för att förklara de höga goodwillposterna som förekommer i Sverige. En förklaring som eventuellt kan anses ligga bakom denna diskrepens av erhållna resultat för svenska företag och tidigare forskning om lågkonjunktur, är den svenska ekonomin. Begreppet tigerekonomi har använts för att beskriva den styrka och beständighet som har illustrerats i den svenska återhämtningen från finanskrisen.

In this dissertation, I investigate the impact of institutional investors on security prices and corporate policies, and offer a new perspective on the vital role that institutional investors play in the modern capital market. Specifically, on the impact on security price movements, I design a new measure of stock-level sentiment based on mutual fund publically disclosed portfolio information and provide a new dimension to better predict stock returns. A trading strategy based on the new sentiment metrics can generate an annualized alpha of 21.27%. The abnormal returns cannot be explained by the time-varying expected returns and transaction costs, and can be best explained by mutual fund overreactions. Hence, my findings can be interpreted as a new anomaly in a new era-when institutional investors are the marginal traders. On the impact on corporate policy side, I document two pieces of new empirical evidence on the importance of long-term institutional holdings: the entrenchment effect of long-term institutional holdings in the context of corporate financing decisions and the active monitoring role of long-term institutional investors in the context of international firms’ accounting qualities. Combined with previous studies which favour a long-term institutional investor, the evidence on the cost side of long-term holding I document here can serve as the first call for an optimal investment horizon for firms operating in the U.S. / Thesis (Ph.D, Management) -- Queen's University, 2012-04-11 22:22:17.627

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The purpose of this study is to investigate the effects of the new Financial Fair Play regulations set forth by the United European Football Association (UEFA) in 2011 on levels of earnings management in European professional football. The Financial Fair Play regulations were imposed as a means of controlling the exorbitant amounts of debt and player’s wages that have threatened the financial stability of many professional football clubs throughout Europe. While UEFA has boasted early success of the new regulations, citing reduced aggregate losses of all football clubs, reduced overdue payables, and less outstanding debt, this study examines levels of discretionary accruals before and after the new regulations were instated to determine if teams are managing earnings to avoid UEFA sanctions. This study collected data from 137 different teams competing in UEFA competition from 2007 to 2013. Discretionary accruals were estimated using the Jones model (1991) as modified by Kothari et al. (2005). The findings of this study were largely inconclusive as a significant difference could not be found in levels of abnormal discretionary accruals before and after the introduction of Financial Fair Play. These findings may suggest that UEFA has succeeded in creating regulations that have curbed an era of extreme leveraging and club losses while simultaneously restricting additional opportunities for club owners to manage earnings that reduce both earnings quality and financial transparency. Overall, the findings from this study highlight the need for more widely available financial information from European football clubs and additional years of financial data under the new regulations.

Using historical firm financial and insider trading information, this paper examines whether high-level insiders manipulate earnings ahead of their own 10b5-1 equity transactions. The empirical evidence suggests that high-level executives appear to manipulate earnings through real activities such as abnormal discretionary expenditures and abnormal cash flows from operations to influence equity prices ahead of their own transactions under Rule 10b5-1. Evidence also suggests that executives appear to be unlikely to engage in earnings management through highly scrutinized means such as accruals. An interpretation of these results is that high-level executives may be using 10b5-1 plans as an offensive tool to trade with the knowledge of inside information, which appears to be in direct opposition to the defensive mechanism that 10b5-1 plans are intended to represent.

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