Eduardo Flores

Earnings management and macroeconomic crises

Purpose – The purpose of this paper is to investigate whether macroeconomic crises are a motivational factor for earnings management practices by the companies listed in the capital markets of Brazil and the USA. Design/methodology/approach – The sample consisted of 7,932 firm-quarter observations from listed Brazilian companies and 99,931 from listed US companies, covering a 13-year period (1998-2010). The authors developed regression models for the panel data, taking into account discretionary accruals as an earnings management proxy (dependent variable), while crises were regarded as a macroeconomic factor (dummy variable of interest). Also considered were return on assets, market-to-book ratio, size, leverage, foreign direct investment, income taxes, quarters, and sectors, which were treated as control variables. Findings – The results corroborate the conceptual issues involved in undertaking this study, and they demonstrate that in periods of macroeconomic crises, companies are more motivated to empl...

A New Approach about Earnings Management and Audit Companies: Empirical Evidences from Brazilian Capital Market

The aim of this study was to evaluate whether the discretionary accruals of Brazilian public companies would reveal changes as a result of the big four firm that audits them, and whether the companies served by firms of less importance in the sector would denote different behaviors in comparison to those contracting the largest four. For this purpose was formed a sample with 7,875 observations originating from 44 quarters from the period of 1998 to 2009, emphasizing the non-inclusion of the other years due to the Brazilian IFRS harmonization. Statistical estimations were carried out based on this sample using the panel data approach. The results showed differences in the discretionary accruals regardless of the size of the audit firm, and also indicated adverse patterns between clients of the four largest firms. Thus it was established that for the Brazilian capital market, simple segregation between big four and others does not appear to make any sense, contrary to the recommendations of literature. Such benchmarking suggests that future surveys conducted in this jurisdiction, which require the use of the auditor control variable, should do so by means of the inclusion of five groups, one for each large auditing company and one for smaller audit firms.

Are Taxes a Determinant Factor in Earnings Management Behavior? Empirical Results from Brazilian Insurance Market

Earnings management is a special issue in accounting theory, and the main impact of the practice is the creation of biases in financial statements. More specifically, earnings management affect accounting profits, and consecutively affect stakeholders in their decisions. According to the specialized literature, earnings management is a practice considered feasible by companies when they glimpse incentives to perform it, and incentives to the practice can be established by different reasons, so one may reasonably believe that enforcements rules of the environment is a special stimulus to the practice. As an example, unequal tax-rules between economic sectors can stimulate the practice of earnings management. So, our purpose is to verify if the legal enforcement by the government authorities created incentives to the earnings management in Brazil. To test the hypothesis, we selected a sample-data composed by Brazilian insurance companies, since this sector suffered a considerable increase in the income-taxes rate in 2008, moving the global rate from 34% to 40% of the accounting profit. Our sample consisted in 2.431 firms-years observations, in 28 quarters between 2006 and 2012. The utilization of this specific group had other important motive: according to Brazilian tax regulatory system, technical provisions from insurance companies can be considered deductible from income taxes. To consider the situation, we created a panel data model with changes in the level of the specified accruals during the selected time and included control variables for a better model specification. The results showed a significant relationship between the increased tax rates and the measure of the technical provisions, showing evidences of earnings management behavior in this industry specifically in the period which the tax-rate was increased for this group of companies.

Credit Card and Financial Well-Being Among Females

The literature documents the impact of credit card use on people’s financial well-being, including special interest in women’s credit card behavior. This chapter examines predictors of the financial well-being for female college students living in Sao Paulo City (Brazil) or New York City (United States), focusing upon behaviors regarding credit card use. The results of structural equation models, based on 784 participants, suggest that financial self-confidence and social comparison impact the respondents’ habits surrounding credit card use and, more largely, influence financial well-being. Although social comparison is more strongly predictive of credit card use among Brazilian women, credit card use behavior has a greater impact on the well-being of American women.

The Effects of Hybrid Financial Instruments Under the Market-Based Accounting Research Perspective: Empirical Evidence from a Cross-Country Approach

The purpose of this study was to evaluate the effects of hybrid financial instruments in market-based accounting research. Thus, value relevance and timeliness models were used to determine how the accounting figures are assimilated by stock prices and returns (Ohlson, 1995; Aboody et al., 1999; Lopes & Walker, 2012). Additionally, the relationships between these bonds and the cost of capital, financial leverage, and the effective tax rate were observed, all of which are crucial to this fundraising tool (Lee & Figlewicz, 1999). The methodological approach was composed of two samples: (1) the interest group, formed by 39 companies that issued hybrid instruments in 10 different jurisdictions; and (2) the control group, comprised of 107 organizations domiciled in the same jurisdictions and having a similar equity composition to the interest group. The observations, collected quarterly from December 2005 to December 2015, totaled 3,386. The findings indicated that the hybrid financial instruments affected the stock prices and returns of the issuers in a positive and statistically significant way, much like other equity elements (e.g., book value per share and earnings per share). Concerning the determinant factors for the issuance of these bonds, it was found that the issuers had a higher cost of capital, more financial leverage, and a lower effective tax rate than the non-issuers. Therefore, it can be concluded that, while new forms of contracts for obtaining resources, such as hybrid financial instruments, are relevant for the financing of business activities, it is essential that accounting models faithfully represent the economic nature of these instruments in order to prevent biases from occurring among the users of financial statements.

Análise do Impacto do IFRS em Indicadores Financeiros em Empresas Brasileiras (Analysis of the Impact of IFRS Adoption on Financial Variables for Brazilian Companies)

Portuguese Abstract: Este trabalho visa avaliar o impacto da adocao das IFRS em variaveis usuais em pesquisas empiricas de financas no mercado brasileiro, tais como: tamanho (ativo total); ativo imobilizado; ROA (retorno sobre o ativo); ROE (retorno sobre o patrimonio liquido); alavancagem, refletindo os efeitos do passivo financeiro sobre o PL; e book-to-market (B/M). Dado o tipo de mudanca ocorrida nas regras contabeis, pesquisadores especialistas ressaltam que o padrao, e comportamento de algumas rubricas contabeis ficaram naturalmente modificadas (Antunes et al, 2012). Por meio de regressoes pooled OLS, com janelas de tempo para periodos diversos, antes e depois da convergencia para o IFRS, achamos evidencia de que algumas variaveis realmente tem um comportamentos diferentes, estatisticamente significante, antes e depois da mudanca. O ativo total e o PL tendem a ter valores maiores. Consequentemente, ROA e ROE tendem a ter valores menores e B/M e alavancagem tendem tambem a ser maiores.English Abstract: This research intends to evaluate the impact of the adoption of IFRS in Brazil on financial variables commonly used in empirical research. These variables are: size of the firm (measured by total assets); net PPE ROA; ROE; leverage (measured by the ratio of total debt to book equity); and the value effect (measured by the ratio book-to-market, B/M). Given the depth of changes from Brazilian previous accounting set of rules to the new IFRS rules, accounting researchers and specialists remark that the pattern of behavior of such variables indeed changed (Antunes et al, 2012). Using pooled OLS regressions, and testing for fixed windows before and after the adoption of the IFRS, we find that some variables have statistical significant changes. Total asset and book equity tend to have higher values, while ROA and ROE tend to have lower values. B/M and leverage tend also to increase after the adoption.