Effect of Accrual-based and real Earnings Management on Firm Value: A Case Study of Companies listed on the Tehran Stock Exchange

Document Type : Research Paper

Authors

1 PhD., Department of Finance and Accounting, Faculty of Economics and Administrative Sciences, Selcuk University, Konya, Turkey.

2 Prof., Department of Finance and Accounting, Faculty of Economics and Administrative Sciences, Selcuk University, Konya, Turkey.

Abstract

Objective: To attract investors, firms should keep their values attractive. If the value of the company decreases, the trust of investors in the company will also decrease. Managers can use earnings management to influence the value of a company. Therefore, in this study, the effect of accrual-based and real earnings management on firm value has been studied. Thus, in addition to assessing the effects of earnings management on the value of the firms, the research findings will also help to develop financial literature in this field due to the use of modern criteria in evaluating the value of firms.
Methods: To achieve the aim of the study, the financial information of 180 firms listed on the Tehran Stock Exchange from 2008 to 2018 was studied. The research hypotheses were also tested using multivariate regression models with combined data.
Results: The research findings showed that accrual earnings management through discretionary accruals and real earnings management through abnormal production costs and abnormal operating cash flows have a positive and significant effect on the value of the firm obtained from free cash flow.But there was no significant relationship between real earnings management through abnormal discretionary expenses and value of the firm obtained from free cash flow. However, the impact of accrued earnings management through discretionary accruals and real earnings management through abnormal production costs and abnormal operating cash flows on the firm's value obtained from economic value added has been negative and significant. Also, real earnings management through abnormal discretionary expenses has had a positive and significant effect on the firm's value obtained from economic value added.
Conclusion: The results show that earnings management affects the value of companies. This effect is positive in some cases and negative in others. This showsthat manipulating discretionary accruals and actual activities have different effects on the value of companies, which can seriously jeopardize the interests of stakeholders in the company. Therefore, in order to prevent the harm of users of financial statements, especially investors, or in the broader perspective of the country's economy through earnings management procedures, it is necessary for organizations and legal institutions responsible in this field to take the necessary measures to prevent earnings management activities.

Keywords

References

Abbas, A. & Ayub, U. (2019). Role of Earnings Management In Determining Firm Value: An Emerging Economy Perspective. International Journal of Advanced and Applied Sciences, 6(6), 103-116
Bacidore, J. M., Boquist. J. A., Milbourn, T. T. & Thakor, A. V. (1997). The Search for the Best Financial Performance Measure. Financial Analysts Journal, 53(3), 11-20.
Buckmaster, D. (1997). Antecedents of Modern Earnings Management Research: income smoothing in literature, 1954–1965. Accounting Historians Journal, 24(1), 75-91.
Caylor, M. L., Christensen, T. E., Johnson, P. M., & Lopez, T. J. (2015). Analysts’ and Investors’ Reactions to Consistent Earnings Signals. Journal of Business Finance & Accounting, 42(9-10), 1041–1074.
Chen, X., Sun, Y. & Xu, X. (2016). Free Cash Flow, Over-Investment and Corporate Governance in China. Pacific-Basin Finance Journal, 37, 81-103.
Cohen, D. & Zarowin, P. (2010). Accrual-Based and Real Earnings Management Activities Around Seasoned Equity Offerings. Journal of Accounting and Economics, 50(1), 2-19.
Darmawan, I. P. E., Sutrisno; T., & Mardiati, E. (2019). Accrual Earnings Management and Real Earnings Management: Increase or Destroy Firm Value? International Journal of Multicultural and Multireligious Understanding, 6(2), 8–19.
Dechow, P. M. & Skinner, D. J. (2000(. Earnings Management. Reconciling the Views of Accounting Academics, Practitioners, and Regulators. Accounting Horizons, 14(2), 235-250.
Ding, R., Li, J. & Wu. (2018). Government Affiliation, Real Earnings Management, and Firm Performance: The Case of Privately Held Firms. Journal of Business Research, 83, 138-150. 
Easley, D. & O'Hara, M. (2004). Information and the cost of capital. Journal of Finance, 59(4), 1553–1583.
Ehrbar, A. (1998). EVA The Real Key to Creating Wealth. John Wiley ve Sons Inc., New York.
Ekim, N. (1998). The Role of Intellectual Capital in Creating Value in Financial Sector: A Research in the Turkish Banking Sector. Selcuk University, Ph.D Thesis in Finance and Accounting.
Etemadi, H. & Shafakhybari, N. (2011). The Effect of Free Cash Flow on Earnings Management and The Role of The Audit Committee. Quarterly Financial Accounting, 3)10), 18-42. (in Persian)
Fakhari, H. & Adili, M. (2013). Investigating The Relationship between Free Cash Flow and Earnings Management through Actual Activities in Listed Companies in Tehran Stock Exchange, Iranian Journal of Accounting and Auditing Review, 19(4), 33-50. (in Persian)
Fama, Eugene F. (1978). The Effect of a Firm’s Investment and Financial Decisions on the Welfare of Its Security Holders. American Economic Review, 68(2), 272-284.
Fernández, P. (2002). Valuation Methods And Shareholder Value Creation. Academic Press., San Diego, California.
Ghazanfari, B., Khoskar, F. & Gorjizadeh, D. (2019). Investigate the Relationship Between Management Tetention and Actual Earnings Management and Company Value. Journal of Accounting and Management Vision, 2(15), 1-15.
Grant, J. L. (1997). Foundations of Economic Value Added. Frank J. Fabozzi Associaties, Pennsylvania.
Gunny, K. A. (2010). The Relation between Earnings Management Using Real Activities Manipulation and Future Perfomance: Evidence from Meeting Earnings Benchmark. Contemporary Accounting Research, 27(3), 855-888.
Ismailzadeh. A. & Keyvanfar, M. (2018(. The Relationship Between Management Strength, Earnings Management and Firm's Value. Financial Accounting and Auditing Research, 10(39), 89-106. (in Persian)
Jogiyanto, H. (2017). Teori Portofolio dan Analisis Investasi. (11th ed.). BPFE: Yogyakarta.
Kamyabi, Y., Shahsavari, M. & Salmani, R. (2016). The Study of the Accrual Earnings Management efffect on the relationship between Real Earnings Management and Cost of capital. Accounting and Auditing Review, 23(1), 19-38. (in Persian)
Kasznik, R. (1999). On the Association between Voluntary Disclosure and Earnings Management. Journal of Accounting Research, 37(1), 57-81.
Kim, J. B. & Sohn, B. C. (2013). Real earnings Management and Cost of Capital. Journal of Accounting and Public Policy, 32(6), 518-543.
Korkmaz, T. K. & Özdemir, M. A. (2003). Ekonomik Katma Değer-EVA Nedir? Active Bankacılık ve Finans Dergisi, 5(33).
Mahendra, A., Artini, L. G. S., dan Suarjaya. (2012). Pengaruh Kinerja Keuangan terhadap Nilai Perusahaan pada Perusahaan Manufaktur di Bursa Efek Indonesia. Jurnal Manajemen, Strategi Bisnis, dan Kewirausahaan, 6(2), 130-138.
Marfuah, M. (2006). Pengaruh Kecanggihan Investor Terhadap Ketepatan Reaksi Pasar Dalam Merespon Pengumuman Dividen Meningkat. Jurnal Akuntansi & Auditing Indonesia, 10(2), 137–154.
Mehrani, S. & Noruzi, S. (2015). Examining the Effect of Corporate Governance on the Relationship Between Firm Value and Earnings Management. Journal of Financial Accounting Knowledge, 2(3), 105-122. (in Persian)
Moradi, J. & Keshavarz, F. (2017). Investigation of the Outcomes Resulting from Managers' Myopia Based on Agency Theory and Free Cash Flow Hypothesis. Journal of Accounting and Auditing Review, 23(4), 546-527. (in Persian)
Nobakht M. & Baradaran Hassanzadeh, R. (2018). Impact of Free Cash Flow on Real and Artificial Earnings Management. Journal of Accounting and Auditing Review; 24(3), 421-440. (in Persian)
Noravesh, I., Momeni yanesari, A. & Safari gerayli, M. (2016). Earnings Quality and Firm Value: Evidence from Iranian Firms. Financial Accounting Research, 7(4), 1-18.
(in Persian)
Rahnamay Roodposhti, F. & Soroushyar, A. (2013). Comparative Assessment of Economic and Accounting Performance Measures Ability in Explaining Value of Companies Listed in Tehran Stock Exchange. Financial Research Journal, 15(1), 29-50. (in Persian)
Ridwan, M. A. & Gunardi, A. (2013). Peran Mekanisme Corporate Governance Sebagai Pemoderasi Praktik Earnings Management Terhadap Nilai Perusahaan. Trikonomika, 12(1), 49–60.
Rodriguez-Ariza, L., Martínez-Ferrero, J. & Bermejo-Sánchez, M. (2016). Consequences of Earnings Management for Corporate Reputation: Evidence from Family Firms. Accounting Research Journal, 29(4), 457-474. 
Roychowdhury, S. (2006). Earnings Management Through Real Activities Manipulation. Journal of Accounting and Economics, 42(3), 335-370.
Sayari, S. & Omri, A. (2017). Earnings Management, Accruals and Stock Liquidity. Journal of Finance and Bank Management, 5(1), 17-28. 
Sevil, G. (2013). Finansal Yönetim II ( yunit 1-4), Anadolu Üniversitesi yayını, Eski Şehir.
Susanto, S., & Christiawan, Y. G. (2016). Pengaruh Earnings Management Terhadap Firm Value. Business Accounting Review, 4(1), 205–216.
Zang, A. Y. (2012). Evidence on the Trade-off Between Real Activities Manipulation and Accrual-Based Earnings Management. The Accounting Review, 87(2), 675–703.
Zhao, Y., Chen. K. H., Zhang, Y. & Davis, M. (2012), Takeover Protection and Managerial Myopia: Evidence From Real Earnings Management. Journal of Accounting and Public Policy, 31(1), 109-135.
Financial Research Journal
Volume 22, Issue 4
2021
Pages 568-593

Files

Share

How to cite

Statistics