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\ud This paper explores whether NHS hospitals in England managed their earnings upward before applying to the government for foundation trust (FT) status—a scheme that allowed them greater financial freedom and management autonomy—in order to present an overly positive picture and increase their chances for a successful application. The paper shows that NHS FTs adjusted discretionary accruals upward for up to two years before applying for FT status. This practice was negatively associated with their future financial performance. Our study contributes to the growing literature on earnings management in the healthcare sector, by taking an event-study approach applied to this sector when significant institutional changes take place.\ud \ud IMPACT\ud This analysis shows that prospective English NHS foundation trusts (FTs), in anticipation of institutional reforms granting them significant freedoms, engaged in income-increasing earnings management more intensely than did NHS trusts that never attained this status. The authors also provide evidence that earnings management is associated, at least partly, with the future underperformance of NHS FTs, confirming an untested hypothesis in the literature. Hence, incentives that the state provides to public organizations can have a significant effect on their behavior—much like in the private sector. The authors call for improved incentive designs by standard-setting (for example CIPFA) and regulatory bodies to prevent unintended consequences in the process of designing optimal healthcare policies.

This study examines the extent to which the effect of firm-level accounting quality on corporate investment efficiency differs across jurisdictions with differential strength of institutional and regulatory enforcement. Institutional enforcement is expected to mitigate adverse selection and moral hazard concerns which drive inefficient investment, in the same way as firm-specific financial reporting quality has been shown to do by previous research within the single-country setting. Using a sample of mandatory IFRS adopters from 25 countries, findings first indicate a significantly negative association between accounting quality and both over- and under-investment, which strongly holds regardless of the institutional characteristics of a country. However, this negative association becomes more pronounced when the level of institutional enforcement is weaker and less effective in a country, consistent with firm-specific reporting quality increasing importance as country-level regulatory enforcement worsens. This evidence indicates that when the effectiveness of institutional enforcement in a country does not successfully alleviate information asymmetries, and does not facilitate the efficient monitoring of corporate insiders by capital providers, there is greater need for firm-specific accounting quality to perform this function and promote efficient investing.

We examine the association between accounting conservatism, expressed in the form of asymmetric timeliness of recognition of economic gains and losses, and corporate social responsibility (CSR). We provide evidence that, under unfavorable macroeconomic conditions and financial constraints, as well as increased levels of outside pressure from debtholders and equity holders, catering for capital providers through conservative reporting becomes a managerial priority over engagement in CSR. Our results overall indicate that, for our whole sample period (starting in the early 2000s), higher levels of conservatism are negatively associated with a CSR orientation shown by firms; however, our analysis also indicates a significant reversing trend regarding the effect of conservatism on CSR, coinciding with the post-financial-crisis period. The findings are robust to a number of specifications and tests, including the use of an instrumental variable approach explicitly addressing endogeneity biases related to reverse causality concerns. Our study suggests that, under monitoring pressure from financial stakeholders, firms prioritize commitment to accounting conservatism over the needs of non-financial stakeholders and other interest groups.

We examine the association between accounting quality, which is used as a proxy for firm information risk, and the behavior of the term structure of implied option volatility around earnings announcements. By employing a large sample of US firms having options traded on their equity during 1996–2010, we find that lower (higher) accounting quality is significantly associated with stronger (weaker) changes in the steepness of the term structure of implied volatility curve around quarterly earnings announcements. This finding (which is robust to controls for business-stemming uncertainty regarding future firm performance) is consistent with a stronger differential of short vs. long-term uncertainty for higher information risk firms, indicating greater uncertainty on the future economic performance of poorer vs. stronger accounting quality firms. We also establish the trading implications of these findings by demonstrating a (profitable in-sample) self-financed option trading strategy that is based on the quality of the accounting information released on earnings announcement days.

This study examines whether the strength of legal enforcement at the country level plays a role in the value-relevance of accounting quality for loan pricing determination, using an international sample of firms reporting under IFRS. The underlying hypothesis is that stronger vs. weaker enforcement should affect the informativeness of financial statements, due to their increased credibility, and thus results in a stronger influence of accounting quality on loan pricing, in case this information is considered more reliable by potential lenders. Evidence indicates that accounting quality is consequential for the determination of loan spread only in combination with the level of legal enforcement, and this only holds for the countries with stronger legal enforcement. This evidence indicates that financial statement quality information is value-relevant and has a significant impact on the determination of loan pricing only if this information is considered to be credible enough by loan providers in a country, and this is the case when legal enforcement is stronger.

Past research has documented a substitution effect between real earnings management (RM) and accrual-based earnings management (AM), depending on relative costs. This study contributes to this research by examining whether levels of (and changes in) financial leverage have an impact on this empirically documented trade-off. We hypothesise that in the presence of high leverage, firms that engage in earnings manipulation tactics will exhibit a preference for RM due to a lower possibility – and subsequent costs – of getting caught. We show that leverage levels and increases positively and significantly affect upward RM, with no significant effect on income-increasing AM, while our findings point towards a complementarity effect between unexpected levels of RM and AM for firms with very high leverage levels and changes. This is interpreted as an indication that high leverage could attract heavy outsider scrutiny, making it necessary for firms to use both forms of earnings management in order to achieve earnin...

In this study, we examine the options market reaction to bank loan announcements for the population of US firms with traded options and loan announcements during 1996–2010. We get evidence on a significant options market reaction to bank loan announcements in terms of levels and changes in short-term implied volatility and its term structure, and observe significant decreases in short-term implied volatility, and significant increases in the slope of its term structure as a result of loan announcements. Our findings appear to be more pronounced for firms with more information asymmetry, lower credit ratings and loans with longer maturities and higher spreads. Evidence is consistent with loan announcements providing reassurance for investors in the short-term, however, over longer time horizons, the increase in the TSIV slope indicates that investors become increasingly unsure over the potential risks of loan repayment or uses of the proceeds.

Purpose – The purpose of this study is to examine the use of accrual-based vs real earnings management (EM) by Greek firms, before and after the mandatory adoption of International Financial Reporting Standards (IFRS). The research is motivated by the fact that past studies have indicated the existence of significant levels of EM for Greece in particular before IFRS. Design/methodology/approach – Accrual-based earnings management (AEM) is examined by assessing performance-adjusted discretionary accruals, while real earnings management (REM) is defined in terms of abnormal levels of production costs, discretionary expenses, and cash flows from operations, for a three-year period before and after the adoption of IFRS in 2005. Findings – The authors find evidence on a statistically significant shift from AEM to REM after the adoption of IFRS, indicating the replacement of one form of EM with the other. Research limitations/implications – The validity of the results depends on the ability of the empirical models used to efficiently capture the existence of AEM and REM. Practical implications – IFRS adoption aims to improve accounting quality, especially in countries with high need for such an improvement; however, the tendency to substitute one form of EM with another highlights unintended consequences of IFRS adoption, which do not improve the informational content of financial statements if EM continues under different forms. Originality/value – Under the expectation that IFRS adoption should lead to improvements in accounting quality, this study examines whether IFRS actually led to a reduction of EM practices for a country with exceptionally high levels of EM before IFRS, by accounting for all possible forms of EM.

Empirical evidence regarding accrual-based earnings management around mergers and acquisitions has been setting-specific as far as target firms are concerned. This might be due to the fact that target firms cannot always anticipate an acquisition proposal, and thus lack the motive and the time necessary to manage their earnings in order to facilitate or impede the deal. In this paper, we provide clear evidence of downward earnings management by a sample of target firms that have both time and motive to engage in such actions. These are firms that publicly announce their intention to be acquired. Publicly ‘seeking a buyer’ represents a rather unusual corporate event, and we find that these firms engage in downward earnings management in the years surrounding the ‘announcement year’. To some extent, this result is explained by overrepresentation of low performance and growth among these firms, and it can be interpreted under alternative explanations. Furthermore, we show that such downward earnings management negatively affects the probability for a ‘seeking buyer’ firm to secure an acquisition within a reasonable amount of time, a possible indication of efficient diligence by prospective buyers having a preference for firms ‘seeking buyer’ with no informationally obscure earnings.

We examine the impact of accounting quality, used as a proxy for information risk, on the behavior of equity implied volatility around quarterly earnings announcements. Using US data during 1996-2010, we observe that lower (higher) accounting quality significantly relates to higher (lower) levels of implied volatility (IV) around announcements. Worse accounting quality is further associated with a significant increase in IV before announcements, and is found to relate to a larger resolution in IV after the announcement has taken place. We interpret our findings as indicative of information risk having a significant impact on implied volatility behavior around earnings announcements.

It has been documented that investments in Research and Development (RD hence, is informative for users of financial statements. Increased informativeness is expected to have repercussions for the effectiveness with which analysts produce earnings forecasts, and, as a result, market efficiency.

PurposeThe purpose of this paper is to provide a comprehensive review of the literature on R&D expenses and subsequent firm valuation and to briefly highlight some gaps and implications for future research.Design/methodology/approachThe approach is a review of studies on R&D and valuation between 1978 and 2007. The valuation issues have been grouped into general topics identified among the overall volume of research: economic characteristics, actual and forecast firm performance, capital structure, risk, and other topics which do not fit into the previous categories.FindingsThe paper provides a comprehensive assessment of the literature findings on a variation of valuation topics useful for internal and external users of financial statements of firms intensive in R&D investments. It sheds light on certain literature limitations and thus guides the users of financial statements regarding to which issues they should pay attention when analysing the financial statements of firms intensive in R&D.Research limitations/implicationsExisting research on R&D and valuation focuses mainly on the USA and UK and therefore raises issues of generalisation of the results.Practical implicationsThe paper provides a useful guide for the users of financial statements of R&D intensive firms, since it provides information on possible consequences of these expenses regarding a variety of valuation issues.Originality/valueThe paper fills an information gap by addressing a range of valuation issues on R&D and offers relevant information guidance to the users of financial statements.

This article is an investigation of the conundrum of firms whose tax-minimising incentives should result in lower reported income by expensing R&D, while their financial reporting ones should result in higher reported income by capitalising R&D. Tax incentives for R&D help align those goals when accounting regulation permits the capitalisation of R&D. We use firms listed in the UK, France, Germany, Italy, Spain, and the Netherlands reporting under IFRS, and find that R&D-related tax benefits at the country level induce firms to at least partly capitalize, rather than expense R&D. Our results also indicate that country-specific R&D tax benefits provide significant incentives for increasing R&D expenditures, especially among high R&D spenders. Our findings are indicative of the influence of R&D tax incentives on accounting policies, well and above the amount of investments they are meant to induce.