Policies to gain investors' confidence in relation to unexpected profits with the moderating role of historically low profit management (experimental evidence: Iran's capital market)

Pouretemadi, Mahjoubeh; Gorganli Davaji, Jomadoordi; Bokharaeian Khorasani, Maryam; Saeidi, Parviz

doi:10.48308/jep.4.1.243

Policies to gain investors' confidence in relation to unexpected profits with the moderating role of historically low profit management (experimental evidence: Iran's capital market)

Document Type : Original Article

Authors

¹ Department of Accounting, Aliabad Katoul Branch, Islamic Azad University, Aliabad Katoul, Iran

² Department of Accounting, Aliabad Katoul Branch, Islamic Azad University, Aliabad Katoul, Iran (Corresponding Author) (gorganli@aliabadiau.ac.ir)

10.48308/jep.4.1.243

Abstract

The fact that the past feelings and behaviors of company managers affect investors, and assessing its impact on the capital market, paves the way for managers and investors to make opportunistic choices. The purpose of this study is to investigate the relationship between past earnings management and earning investor trust using financial information related to companies listed on the stock exchange during the period 1394 to 1399. For this purpose, multivariate linear regression methods based on panel data and fixed effects methods have been used. The results of this study show that companies 'unexpected earnings do not have a significant effect on earning investors' trust and the impact of the company's low earning management in the past has not affected this relationship. However, stock prices have reacted negatively and significantly to earnings, and companies' past low earnings management has moderated this effect. In other words, it can be said that earnings management in the past reduces the stock price response to earnings announcements.

Keywords

20.1001.1.27171485.2023.4.1.10.4

References

Ali, A, Zhang, W. (2015). CEO Tenure and Earnings Management. Journal of Accounting and Economics, 59(1): 60-79.

Asnaashari, H., Asadi, G., & Ghahraie, E. (2020). The Relationship between Earnings Management Patterns with Investors’ Sentiment. Journal of Financial Accounting Research, 12(3): 45-62.

Baker, M., Wurgler, J. (2007). Investor Sentiment in the Stock Market. Journal of Economic Perspectives, 21(2): 129-151.

Barton, J., Simko, P. (2002). The Balance Sheet as an Earnings Management Constraint. The Accounting Review, 77(S-1): 1-27.

BashiriManesh, N., Oradi, J. (2019). Investors' Emotional Behavior and Accounting Earnings Management. Experimental Accounting Research, 9(33): 77-99.

Brown, K., Chen, S., Kim, M. (2015). Earnings Management through Real Activities Choices of Firms near the Investment–speculative Grade Borderline. Journal of Accounting and Public Policy, 34(1): 74-94.

Brown, G., Cliff, M. (2005). Investor Sentiment and Asset Valuation. Journal of Business, 78(2): 405-440.

Callao, S., Jarne, J., Wroblewski, D. (2014). The Development of Earnings Management Research: A Review of Literature From three Different Perspectives. Zeszyty Teoretyczne Rachunkowosci, 79(135): 135-178.

Dechow, P., Skinner, D. (2000). Earnings Management: Reconciling the Views of Accounting Academics, Practitioners, and Regulators. Accounting Horizons, 14(2): 235-250.

Eugster, F., Wagner, A. (2021). Earning Investor Trust: The Role of Past Earnings Management. Journal of Business Finance & Accounting, 48(1-2): 269-307.‏

Gunny, A. (2010). The Relation between Earnings Management Using Real Activities Manipulation and Future Performance: Evidence From Meeting Earnings Benchmarks. Contemporary Accounting Research, 27(3): 855–888.

Healy, P., Wahlen, J. (1999). A Review of the Earnings Management Literature and its implications for Standard Setting. Accounting Horizons, 13(4): 365-383.

Howe, M. (1999). Management Fraud and Earnings Management: Fraud versus GAAP as a Means to Increase Reported Income. PhD Thesis, University of Connecticut.

Hribar, P., McInnis, J. (2012). Investor Sentiment and Analysts’: Earnings Forecast Errors. Management Science, 58(2): 293-307.

Ising, P. (2013). Earnings Accruals and Real Activities Management around Initial Public Offerings: Evidence from Specific Industries. Springer Science & Business Media.

Jensen, C. (2005). Agency Costs of Overvalued Equity. Financial Management, 34(1): 5-19. Kent, R., Routledge, J. (2017). Use of Benchmarks in Predicting Earnings Management? Accounting & Finance, 57(1): 239-260.

Kasznik, R. (1999) on the Association between Voluntary Disclosure and Earnings management. Journal of Accounting Research, (37):18-38.

Lee, C., Shleifer, A., Thaler, R. (1991). Investor Sentiment and the Closed end Fund Puzzle. Journal of Finance, 46(1): 75-109.

Lee, D. (2017). Corporate Social Responsibility and Management Forecast Accuracy. Journal of Business Ethics, 140(2): 353-367.‏

Leuz, C., Nanda, D., Wysocki, P. (2003). Earnings Management and Investor Protection: An International Comparison. Journal of Financial Economics, 69 (3): 505-527.

Miranda, F., Machado, A., Macedo, L. (2018). Investor Sentiment and Earnings Management: Does Analysts’Monitoring Matter?. Revista de Administração Mackenzie, (19):73-98.

Mota, G., Silva Filho, A., Oliveira, A., Paulo, E. (2017). Previsão de lucro e gerenciamento de resultados: Evidências empíricas no mercado acionário brasileiro. Revista Universo Contábil, 13(1): 6-26.

Muliati, A., Mayapada, G., & Pattawe, A. (2021). Do Corporate Social Responsibility and Investor Protection Limit Earnings Management? Evidence from Indonesia and Malaysia. Journal of Accounting and Investment, 22(3): 214-232.

Pae, J. (2005). Expected Accrual Models: the Impact of Operating Cash Flows and Reversals of Accruals. Review of Quantitative Finance and Accounting, 24(1): 5-22.

Perols, L., Lougee, B. (2011). The Relation between Earnings Management and Financial Statement Fraud. Advances in Accounting, 27(1): 39-53.

Pourheidari, O., Rahmani, A., Gholami, R. (2013). The Impact of Real Earnings Management on Investment Behavior of Companies Listed on Tehran Stock Exchange. Journal of Accounting Advances, 5(1): 55-85.

Ronen, J., Yaari, V. (2008). Earnings Management: Emerging Insights in Theory, Practice, and Research. Springer Science Business Media, LLC.

Roychowdhury, S. (2006). Earnings Management through Real Activities Manipulation. Journal of Accounting and Economics, 42(3): 335-370.

Sloan, R. (1996). Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About Future Earnings?. The Accounting Review, 71(3): 289-315.

Suto, M., Takehara, H. (2021). Corporate Social Responsibility Intensity, Management Earnings Forecast Accuracy, and Investor Trust: Evidence from Japan. Corporate Social Responsibility and Environmental Management, 27(6): 3047-3059.‏

Xu, Z., Taylor, K., Dugan, T. (2007). Review of Real Earnings Management Literature. Journal of Accounting Literature, 7(26): 195-228.