International Journal of Nonlinear Analysis and Applications
Stock market reaction to real earnings management, financial risk and business risk
Document Type : Research Paper
Authors
Department of Accounting , Bandar Abbas Branch, Islamic Azad University, Bandar Abbas, Iran
Abstract
Studies conducted on real earnings management seek to identify abnormal levels of business unit activities since real earnings management is associated with a change in timing or structure of the real activities of a business unit. However, more limited studies have been conducted on the effect of real earnings management on investors' decisions and market stakeholders and types of companies' risks. Thus, the present study is an attempt to examine the market reaction to real earnings management, financial risk and business risk of companies listed on the Tehran Stock Exchange. The present study is descriptive in terms of nature and correlational in terms of method. The statistical population of the present study is the companies listed on the Tehran Stock Exchange during 2008-2018. A total of 260 companies were selected as statistical samples using the systematic elimination method. The data were collected from relevant and valid databases and analyzed using regression equations and panel data. The results revealed that the market reaction to real earnings management and financial risk of companies is negative and its reaction to business risk is positive. Real earnings management also has a significant effect on the financial and business risk of the studied companies.
Keywords
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weaknesses, J. Appl. Account. Res. 19(3) (2018) 423–439.
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Res. Int. Bus. Finance 34(1) (2015) 309–323.
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Manag. Finance 45(3) (2019) 366–380.
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(2009) 4377–4422.
[36] L. P´astor and P. Veronesi, Learning in financial markets, Ann. Rev. Financ. Econ. 1(1) (2009) 361–381.
[37] S. Roychowdhury, Earnings management through real activities manipulation, J. Account. Econ. 42(3) (2006)
335–370.
[38] H. Sadeghi and M. Shams, Calculating the value at risk based on the Cornish-Fisher approximation of the normal
distribution (A study in the financial institutions of the Tehran Stock Exchange), Asset Manag. Financ. 2(1)
(2014) 1–20.
[39] M. Salehi, S.M. Mousavi Shiri and M. Ebrahimi Suizi, The information content of the declared and predicted
earnings per share in explaining the abnormal stock returns, Financ. Account. Audit. Res. (J. Financ. Account.
Audit.) 6(21) (2014) 117–140.
[40] K. Schipper, Commentary on earnings management, Account. Horiz. 3(4) (1989) 91–102.
[41] R. Sensarma and M. Jayadev, Are bank stocks sensitive to risk management?, J. Risk Finance 10(1) (2020) 7–22.
[42] W. Sharpe, J .Gordon and A. Jeffrey, Investments, Prentice-Hall, 1998.
[43] A.Y. Zang, Evidence on the trade-off between real activities manipulation and accrual-based earnings management,
Account. Rev. 87(1) (2011) 675–703.
[44] T. Zhu, M. Lu, Y. Shan and Y. Zhang, Accrual-based and real activity earnings management at the back door:
Evidence from Chinese reverse mergers, Pacific-Basin Finance J. 35(Part A) (2015) 317–339.
[2] G. Adomian, Solving Frontier Problem of Physics: The Decomposition Method, Kluwer Academic Press: Dor
drecht the Netherlands, 1994.
[3] A. Aghaei, A. Saghafi and J. Asadnia, High, seasonal financial profit of companies and loans to provide information
need for stockeholders, Financ. Account. 4(16) (2012) 1–39.
[4] A. Ahmadpour, H. Amouzad Mehdiraji, Investigating the Impact of Business Risk and Financial Risk on the
Investment Portfolio of Asia Insurance Company in the Stock Exchange, J. Insurance Indust. 22(1) (2007)114–
116.
[5] A. Alzahrani and L. Skerratt, How markets react to earnings announcements in the absence of analysts and
institutions: evidence from the Saudi market, Int. J. Monet. Econ. Finance 3(4) (2009) 338–358.
[6] M. Arabsalehi, S. Moayedfar and R. Karimi, The impact of environmental risk, strategy and investment company
on the company’s performance listed on the Tehran Stock Exchange, Financ. Account. Res. 4(3) (2012), 47–70.
[7] I.K. Argyros, Quadratic equations and applications to Chandrasekhar and related equations, Bull. Aust. Math.
Soc. 32(1985) 275–292.
[8] J. Banas and K. Goebel, Measures of Noncompactness in Banach Spaces, Marcel Dekker, New York, 1980.
[9] J. Banas and M. Lecko, Fixed points of the product of operators in Banach algebra, Panamer. Math. J. 12 (2002)
101–109.
[10] J. Banas and B. Rzepka, On existence and asymptotic stability of solutions of a nonlinear integral equation, J.
Math. Anal. Appl. 284 (2003) 165–173.
[11] J. Banas and K. Sadarangani, Solutions of some functional integral equations in Banach algebra, Math. Comput.
Modell. 38 (2003) 245–250.
[12] J. Caballero, A.B. Mingarelli and K. Sadarangani, Existence of solutions of an integral equation of Chandrasekhar
type in the theory of radiative transfer, Elect. J. Differ. Eqs. 57 (2006) 1–11.
[13] S. Chandrasekhar, Radiative Transfer, Oxford Univ. Press, London, 1950.
[14] C. Chapman, The effects of real earnings management on the firm, its competitors and subsequent reporting
periods, Soc. Sci. Res. Network (SSRN), (2011).
[15] K.P. Chathoth and M.D. Olsen, The effect of environment risk, corporate strategy, and capital structure on firm
performance, J. Hospitality Management, 26(3) (2007) 502–516.
[16] J. Chen, H. Hong and J.C. Stein, Forecasting crashes: Trading volume, past returns, and conditional skewness in
stock prices, J. Financ. Econ. 61(3) (2001) 345-381.
[17] H. Cho, S. Choi and D.-H. Kwon, Employee tenure and earnings management through real activities manipulation,
Asia-Pacific J. Account. Econ. 10(1) (2019) 67–76.
[18] D. Cohen and P. Zarowin, Accrual-based and real earnings management activities around seasoned equity offering,
J. Account. Econ. 50(4) (2010) 2–19.
[19] C. Corduneanu, Integral Equations and Applications, Cambridge University Press, New York, 1990.
[20] B.C. Dhage, On α-condensing mappings in Banach algebras, The Math. Student 63 (1994) 146–152.
[21] J. Francis, D.J. Nanda and P. Olsson, Voluntary disclosure, earnings quality and cost of capital, J. Account. Res.
46(1) (2008) 53–99.
[22] K.A. Gunny, The relation between earnings management using real activities manipulation and future performance: Evidence from meeting earnings benchmarks, Contemporary Account. Res., 27(1) (2010) 855–888.
[23] M.M. Hadi, Review of capital market efficiency: Some evidence from Jordanian market, Int. Res. J. Finance
Econ. 3(1) (2006) 13–27.
[24] J.S. Hammersley, L.A. Myers and C. Shakespeare, Market reactions to the disclosure of internal control weaknesses and to the characteristics of those weaknesses under section 302 of the Sarbanes Oxley Act of 2002, Rev.
Account.Stud. 13(1) (2008) 141–165.[25] F. Heybati and V. Zandie, Investors’ overreaction in Iran stock market to global financial crisis news, Financ.
Knowledge Secur. Anal. 4(9) (2011) 75–100.
[26] N. IzadiNia, H. Rabiee and N. Hamidian, Investigating the relationship between financial leverage and real earnings
management of companies accepted in Tehran Stock Exchange, J. Account. Advances, Shiraz Univ. 5(1) (2013)
33–54.
[27] B. Khodarahmi, H. Foroughnejad, M.J. Sharifi and A. Talebi, The effect of information asymmetry on the risk
of future stock price falls of companies listed on the Tehran Stock Exchange, Asset Manag. Financ. 4(3) (2016)
39–58.
[28] J.B. Kim and B.C. Sohn, Real earnings management and cost of capital, J. Account. Public Policy 32(1) (2013)
518–543.
[29] Y. Li, Y. Park and J. Wynn, Investor reactions to restatements conditional on disclosure of internal control
weaknesses, J. Appl. Account. Res. 19(3) (2018) 423–439.
[30] C. Medeiros and A.L. Martinez, Earnings manipulations by real activities management and investors’ perceptions,
Res. Int. Bus. Finance 34(1) (2015) 309–323.
[31] H.M. Miller and F. Modigliani, Dividend policy, growth, and the valuation of shares, J. Bus. 34(4) (1961) 411–433.
[32] J.A. Ohlson, The theory of value and earnings, and an introduction to the Ball-Brown analysis, Contemp. Account.
Res. 8(1) (1991) 1–19.
[33] T. Opler and C.S. Titman, Financial distress and corporate performance, J. Finance 3(1) (1994) 1015–1040.
[34] F.K. Ozo and T.G. Arun, Stock market reaction to cash dividends: evidence from the Nigerian stock market,
Manag. Finance 45(3) (2019) 366–380.
[35] A. Ozoguz, Good times or bad times? Investors’ uncertainty and stock returns, he Rev.iew of Financ. Stud. 22(1)
(2009) 4377–4422.
[36] L. P´astor and P. Veronesi, Learning in financial markets, Ann. Rev. Financ. Econ. 1(1) (2009) 361–381.
[37] S. Roychowdhury, Earnings management through real activities manipulation, J. Account. Econ. 42(3) (2006)
335–370.
[38] H. Sadeghi and M. Shams, Calculating the value at risk based on the Cornish-Fisher approximation of the normal
distribution (A study in the financial institutions of the Tehran Stock Exchange), Asset Manag. Financ. 2(1)
(2014) 1–20.
[39] M. Salehi, S.M. Mousavi Shiri and M. Ebrahimi Suizi, The information content of the declared and predicted
earnings per share in explaining the abnormal stock returns, Financ. Account. Audit. Res. (J. Financ. Account.
Audit.) 6(21) (2014) 117–140.
[40] K. Schipper, Commentary on earnings management, Account. Horiz. 3(4) (1989) 91–102.
[41] R. Sensarma and M. Jayadev, Are bank stocks sensitive to risk management?, J. Risk Finance 10(1) (2020) 7–22.
[42] W. Sharpe, J .Gordon and A. Jeffrey, Investments, Prentice-Hall, 1998.
[43] A.Y. Zang, Evidence on the trade-off between real activities manipulation and accrual-based earnings management,
Account. Rev. 87(1) (2011) 675–703.
[44] T. Zhu, M. Lu, Y. Shan and Y. Zhang, Accrual-based and real activity earnings management at the back door:
Evidence from Chinese reverse mergers, Pacific-Basin Finance J. 35(Part A) (2015) 317–339.
)
Volume 13, Issue 1
March 2022Pages 3347-3361
- Receive Date: 12 March 2021
- Revise Date: 12 May 2021
- Accept Date: 28 May 2021