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Investor sophistication and earnings management during economic crisis: evidence from the banking industry

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  • Oudam Toeung

    ()
    (IAE Grenoble - Institut d'Administration des Entreprises - Grenoble - Université Pierre-Mendès-France - Grenoble II)

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    Abstract

    This paper is written to give fundamental understanding on earnings management of the banks during 2008 global financial crisis. It provides various literature reviews on earnings management of firms during a severe economic downturn, and during the period of its financial distress. Although a large number of researchers support evidence on smoothed earnings, there are some researchers suggest that big bath accounting is very beneficial during the crisis. To help firms get out of their financial difficulty, remove future earnings drag, and improve future performance, I strongly expect that big bath accounting is highly preferable for banks during the global financial crisis. Therefore, banks report large negative discretionary accruals (more loan loss provisions). Nevertheless, the ability of sophisticated investors in detecting earnings management is very high compared to unsophisticated ones, so I expect that only sophisticated investors are able to recognize the earnings components just after earnings announcement but prior to release of quarterly earnings reports.

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    File URL: http://dumas.ccsd.cnrs.fr/docs/00/93/43/29/PDF/TOEUNG_Oudam_FIN2EFA.pdf
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    Bibliographic Info

    Paper provided by HAL in its series Post-Print with number dumas-00934329.

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    Date of creation: 2013
    Date of revision:
    Handle: RePEc:hal:journl:dumas-00934329

    Note: View the original document on HAL open archive server: http://dumas.ccsd.cnrs.fr/dumas-00934329
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    Web page: http://hal.archives-ouvertes.fr/

    Related research

    Keywords: Earnings management; big-bath accounting; investor sophistication;

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    1. DeAngelo, Harry & DeAngelo, Linda & Skinner, Douglas J., 1994. "Accounting choice in troubled companies," Journal of Accounting and Economics, Elsevier, vol. 17(1-2), pages 113-143, January.
    2. Jiraporn, Pornsit & Miller, Gary A. & Yoon, Soon Suk & Kim, Young S., 2008. "Is earnings management opportunistic or beneficial? An agency theory perspective," International Review of Financial Analysis, Elsevier, vol. 17(3), pages 622-634, June.
    3. Chung, Richard & Firth, Michael & Kim, Jeong-Bon, 2002. "Institutional monitoring and opportunistic earnings management," Journal of Corporate Finance, Elsevier, vol. 8(1), pages 29-48, January.
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    6. Barton, Jan & Waymire, Gregory, 2004. "Investor protection under unregulated financial reporting," Journal of Accounting and Economics, Elsevier, vol. 38(1), pages 65-116, December.
    7. Steven Balsam, 2002. "Accruals Management, Investor Sophistication, and Equity Valuation: Evidence from 10-Q Filings," Journal of Accounting Research, Wiley Blackwell, vol. 40(4), pages 987-1012, 09.
    8. Ahmed, Kamran & Godfrey, Jayne M. & Saleh, Norman M., 2008. "Market perceptions of discretionary accruals by debt renegotiating firms during economic downturn," The International Journal of Accounting, Elsevier, vol. 43(2), pages 114-138.
    9. Vander Bauwhede, Heidi & Willekens, Marleen & Gaeremynck, Ann, 2003. "Audit firm size, public ownership, and firms' discretionary accruals management," The International Journal of Accounting, Elsevier, vol. 38(1), pages 1-22.
    10. Roychowdhury, Sugata, 2006. "Earnings management through real activities manipulation," Journal of Accounting and Economics, Elsevier, vol. 42(3), pages 335-370, December.
    11. Kalelkar, Rachana & Nwaeze, Emeka T., 2011. "Sarbanes-Oxley Act and the quality of earnings and accruals: Market-based evidence," Journal of Accounting and Public Policy, Elsevier, vol. 30(3), pages 275-294, May.
    12. Jin, Justin Yiqiang & Kanagaretnam, Kiridaran & Lobo, Gerald J., 2011. "Ability of accounting and audit quality variables to predict bank failure during the financial crisis," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2811-2819, November.
    13. Lo, Kin, 2008. "Earnings management and earnings quality," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 350-357, August.
    14. Choi, Jong-Hag & Kim, Jeong-Bon & Lee, Jay Junghun, 2011. "Value relevance of discretionary accruals in the Asian financial crisis of 1997-1998," Journal of Accounting and Public Policy, Elsevier, vol. 30(2), pages 166-187, March.
    15. Humphrey, Christopher & Loft, Anne & Woods, Margaret, 2009. "The global audit profession and the international financial architecture: Understanding regulatory relationships at a time of financial crisis," Accounting, Organizations and Society, Elsevier, vol. 34(6-7), pages 810-825, August.
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