Earnings management : income smoothing incentives in Hong Kong

Pao Yue-kong Library Electronic Theses Database

Earnings management : income smoothing incentives in Hong Kong

 

Author: Chan, Chi-wan Owen
Title: Earnings management : income smoothing incentives in Hong Kong
Year: 2000
Subject: Corporate profits -- China -- Hong Kong
Hong Kong Polytechnic University -- Dissertations
Department: Multi-disciplinary Studies
Dept. of Accountancy
Pages: v, 132 leaves ; 30 cm
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b1524869
URI: http://theses.lib.polyu.edu.hk/handle/200/4572
Abstract: Many studies revealed that directors used earnings management to dampen the fluctuation of earning level of a firm. (DeFond and Park 1997). In some ways, directors applied earnings management for their own benefits because their bonus plans were usually tied with the earning of the firm (Gaver, Gaver and Austin 1995). This study is based on the paper by Moses (1987). I have used 988 firm - year observations of common stocks listed on the Stock Exchange of Hong Kong for the 1991-1996 period to investigate the incentives under which directors use earnings management. I run cross-sectional multivariate regressions to study the relationships between discretionary accruals (DAC), a proxy of earnings management, and the independent variables namely "firm size" (SIZE), "market share" (MKSH) "bonus compensation" (BONC), "ownership control" (OWNC), "premanaged operating cashflows deviation" (POD) and "past earnings variability".(VAR). The full sample, each industry sector, the positive and negative POD groups, the high and low bonus groups are studied in order to find out any differences among industry sectors and groups. This study finds out that the explanatory variables POD/A, VAR/A, In SIZE, MKSH and BONC are important factors that influence the directors to use earnings management as a whole. OWNC has its explanatory power only in the properties, consolidated enterprises and industrials sector. The results indicates that the prime objectives of the directors in employing earnings management is to smooth earnings, avoid political cost and to increase directors' compensation. This paper concludes that earning numbers have their information content. It is widely believed that there is a strong relationship between earnings and market price of a firm. Directors signal the firm's inside information to investors through earning numbers. The study supports the income smoothing hypothesis that directors will smooth income in order to avoid any large fluctuation of earnings level which may affect the share price of a firm.

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