the timing of asset sales and earnings manipulation eli bartov presented by: herlina helmy...
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THE TIMING Of ASSET SALES And EARNINGS
MANIPULATION
Eli Bartov
Presented By:
Herlina Helmy 0806435495
INTRODUCTION1
PRIOR RESEARCH2
HYPOTHESES FORMULATION3
RESEARCH DESIGN4
Outline
RESULT & ANALYSIS5
6Contribution & Limitations
CONCLUSION6
INTRODUCTION
Motivation
APB opinion No. 3 classified that income or losses from PPE not recognize as ordinary item, but as Part of income from operation
Management use that houl in earnings manipulation, especially income smoothing and debt-equity hypothesis
Because of that so many managers do some earning manipulation at that time (fortune, 1989; Schipper 1989)
Cont’d..
Purpose of this study
Examining of a form of real
earning manipulation:
timing of income recognition
from disposal of assets
Research
Question
Does Manager manipulate
reported earning trough choice
timing of income recognition
from disposal of asset.
PRIOR RESEARCHResearch Result
Hand, 1989; Hand et all.1990
Explored real earning manipulation in the context of early debt retirement
Ronan & Saden 1981
Investors employ income from continuing operations, rather than net income, in their decision making
Dye 1988; Truman & Titman 1988
Managers manipulate earnings to affect investors perceptions
Barnea et al 1975 Income smoothing is a vehicle for management to convey its earnings expectations within generally accepted accounting principles (GAAP), which do not permit making direct forecasts
Watts 1982 Earnings manipulations are pointless because market participants are sophisticated and are able to undo such manipulations
Healy 1985 Bonus plan enhance of earnings manjement
HYPOTHESES FORMULATION
- The earnings-smoothing hypothesis suggest that earnings are manipulated to reduce fluctuations around some level considered normal for the firm
- This study use EPS as a target, advocates the use of this definitions by two reason:1. It is relatively simple2. It appears more realistic than other definitions
H1: There is a negative correlation between income from asset sales and earnings changes (exclusive of asset sale effects
Cont’d….
Debt covenants require borrowing firms to maintain specified levels of accounting numbers and debt-equity ratio
Larger a firm’s debt-equity ratio, the more likely its manager are to shift reported earning from future periods to a current period and to engage in Greater manipulation
In timing asset sales, debt-equity hypotheses suggest:
H2: There is a positive correlation between income from asset sales and debt-equity ratios
RESEARCH DESIGN
Data Description
- Compustat expanded annual File with OTC firms
- COMPUSTAT quarterly industrial- Daily stock returns is taken NYSE/
ASE and NASDAQ- Period: 1987-1989- Final sample: 653 firm-year
divided in 2 sample group:1. 397 gain firms2. 256 loses firms
The Research design for two task:1. To test empirical implication of earnings
smoothing and debt equity hypotheses2. To assess the sensitivity of the results to possible specification error
Hypotheses testing in 3 ways:1. Univariate Test2. Multiple regression3. Sensitivity analysis
Cont’d…. Main Model – Multiple Regression:
ASSIN: income from asset sales in current year/stock price at beginningδ EPS=EBT-income fom asset sales per shareDETEQ=Book value LTD current year/BE at beginningε=residual
Main Sensitivity Analysis
SALEP=sales of long-lived aasset (PPE)current year/MVE beginning yearSALEIN=sales of investment current year/MVE beginning yearBonus1:upper bound Bonus plan – EBT current year/ MVE awal th.
if EBT < lower bound set 0BONUS2: dummy variable.
1 = lower bound > EBT, 0 = otherTAX = dummy variable.
1 = Looses in asset sales dan EBTexclude sales looses asset bernilai postif0 = other
RESULT
• Firm size was selected due to importance in explaining cross-sectional differences with respect to such characteristic as firm performance and risk
• Current ratio was selected as a measure for the short-time soundness of the firm
• Although the sample clearly spans a wide range of firm size, sample firms are substantially smaller than other COMPUSTAT firms
• Current ratio of the sample firms are larger than those of the other COMPUSTAT firms,& the sample firms thus appear financial healthy
(Table1)
Cont’d….
Median: 0.09%, Mean: 1.23%With level significant 5%
Earnings smoothing hypothesisImplies that firms exhibit a Negative earnings changeBefore asset sale income should Report higher income from Asset sales than firms thatExperience a positive change
H1
Univariate Test
H2
Support H1
Result
Univariate Test For Earning-Smoothing Hypotheses
Cont’d….
Result• Hand et al shows result at fourth fiscal
year the sale of long-lived assets.
Univariate Test for Debt-Equity Hyphothesis
Median: 0.09%, Mean: 1.23%With level significant 5%
Debt-Equity Hypothesis Implies that income from assetSales by higher-leverage firms Exceeds that for lower-leverage firms
H2
Univariate Test
H2
Support H2
Result
- Full Sample α1 negative significant, α2 positive significant- Tests show that the earnings-smoothing and the debt-equity effects are jointly zero can be rejected with high level convidence
Multiple Regression Tests
-The earnings-smoothing effect is documented in both subsamples, Which suggest that both positive and negative earnings change may
be subject to smoothing-The slope etimates for the subsample of firms with negative EPS exceed the sub sample
Of firms with positive EPS
Multiple Regression Tests
Sensitivity Analysis
• SALEP & SALEIN positive, and significant• Bonus plan1 negative, not significant• Tax, negative significant, implies that tax play important role
in timing asset sales