EARNING MANAGEMENT IN ENTITIES IN UK

Earning Management in Entities in UK

Table of Contents

Chapter 1: Introduction4

Purpose of the Study4

Problem Statement5

Aims of the Study5

Research Question6

Limitations of the Study6

Structure of the Study7

Chapter 2: Literature Review8

Voluntary accounting disclosures8

Motives for earnings management9

Chapter 3: Research Methodology12

Research Method12

Hypothesis Formulation12

Theoretical Framework14

Emperical Data15

Hypotheses16

Chapter 4: Findings and Data Analysis17

Findings17

Earnings management and voluntary accounting disclosures17

Earnings management and debt covenant violation20

Earnings management and equity and debt capital22

Earnings management and executive compensation23

Earnings management and analysts' forecasts25

Discretionary accruals and firm financial attributes26

Chapter 5: Conclusion27

Limitations of the Study29

Implications of the Study30

References32

Appendix A: Tables37

Earning Management in Entities in UK

Chapter 1: Introduction

In their struggle to maximise firms' profits and stock value, managers may sometimes be inclined to make use of earnings management practices ([Jiraporn et al., 2008] and [Jiraporn et al., 2008]). Earnings management relates to the use of discretionary accounting accruals to influence reported earnings (Jones, 1991). The implementation of such practices may be inspired by the appreciation that the stock market shows when favourable accounting numbers are reported (Junttila, Kallunki, Kärja, & Martikainen, 2005).

Sometimes, firms are inclined to disclose information that is in excess of what is required by the law. These voluntary disclosures aim mainly at improving firms' image and making it more appealing to investors. Hence, it follows that the provision of voluntary disclosures would probably reduce the scope for earnings management (Schipper, 1989), since the provision of additional information would allow accounting users to detect phenomena of fraud, irregularity and shareholder misguidance.

Purpose of the Study

This study examines whether firms employ earnings management procedures in order to improve their financial picture and impress stock market participants. The study seeks to identify motives for earnings management. Here, the study focuses on the relation between the provision of voluntary accounting disclosures, debt covenant violation, executive compensation, equity and debt capital, and financial analysts' forecasts, with earnings management.

Problem Statement

In order to avoid breaching debt covenants, which would negatively affect the company market picture and weaken the creditability and terms of borrowing, firms might resort to earnings management. Managers might also use earnings management techniques in order to enhance their compensation arrangements and wealth. In order to acquire the capital needed, a firm addresses the capital and money markets by issuing equity or debt capital. Firms might, therefore, engage in earnings management in order to impress capital providers and make the issues of stock and debt capital attractive and successful (see Hirshleifer, Hou, Teoh, & Zhang, 2004).

Aims of the Study

The study focuses on UK listed firms and examines whether there is a relation between earnings management and voluntary accounting disclosures, debt covenant violation, managers' compensation, equity and debt capital accessibility and meeting financial analysts' forecasts. The study also seeks to identify the financial characteristics of firms that use earnings management and the motives that urge them to resort to earnings management practices.

Research Question

Whether firms that are in need of capital or in an unfavourable financial situation would employ earnings management in order to improve their financial numbers, and subsequently impress capital providers and other ...