Minna Martikainen

Earnings management as a predictor of future profitability of Finnish firms

This study investigates whether the level of current earnings management can be used to predict future profitability of Finnish firms. Earnings management is assumed to predict future profitability, because firms use discretional accruals to manage this years earnings upwards/downwards, if they believe that the next years earnings will be high/low. Finnish data are used because the extent of the earnings management can be directly measured from the published Finnish financial statements. The results indicate that the lagged earnings management is significantly related to the future profitability of a firm. The lagged earnings management also contains incremental information relative to past profitability or stock prices when predicting future profitability.

Do firms use industry-wide targets when managing earnings? Finnish evidence

Abstract This study investigates the adjustment process of the earnings management of the firm to industry-wide targets in Finland, where accounting and tax legislation provide extensive possibilities for firms to manage their earnings. In addition, the amount of earnings management is directly measurable from published financial statements of the Finnish firms. The results of the study indicate that the management of a firm takes into account the extent of the earnings management of other firms operating in the same industry when managing reported earnings. Furthermore, firms seem to consider mainly the permanent part of the change in the industry average when determining the target level of earnings management.

Investments in Human Capital in Different Institutional Environments

Abstract This chapter investigates the proportion of labor costs that represents investments in human capital, and the rate of amortization of this asset in all six countries for which the required data are available in the Compustat Global Vantage database. The sample includes countries with different financial and legal systems, which enables us to investigate how the growth and depreciation rates of human capital and the resulting human capital asset ratio differ in different institutional environments. The results indicate that the estimated proportion of labor expenses that represents investments in human capital is large in the so-called common-law countries with a market-based financial system. On the other hand, the depreciation rate of the estimated human capital assets is lower in these countries. The results, therefore, indicate that the human capital assets are high in equity-oriented financial reporting environments. The results also indicate that the estimated ratios of the human capital asset to market value of equity are reasonably related to firm characteristics that are hypothesized to be determinants of the human capital asset ratios. Finally, these results remain the same in different industries.

Board's Financial Incentives, Competence, and Firm Risk Disclosure: Evidence from Finnish Index Listed Companies

Purpose - – The purpose of this paper is to examine novel corporate governance-based determinants of risk disclosures among index-listed Finnish companies. Therefore the focus of the study is on explaining the board’s monitoring role in relation to corporate managers. Design/methodology/approach - – Firms’ risk disclosures are analysed in terms of their Findings - – The authors find that the risk disclosures of these firms can be explained by financial incentives (wealth and compensation) and competence-related factors (attrition rate and education). The results indicate that among the “best disclosers”, the narrative risk disclosures are, on average, on a high level, and variation in risk reporting is largely associated with board characteristics. Research limitations/implications - – The relatively small sample size makes the results vulnerable to type two error. Further research could continue by examining the impact of board work on corporate disclosures across countries and disclosure items. Practical implications - – Board members’ financial incentives and competence impact the dynamism of board work. In this way, they are also associated with board members’ disclosure decisions. Originality/value - – This paper contributes to the extant literature by demonstrating the impact of previously unexamined board characteristics on the quality of the narrative risk disclosures of highly followed firms.

Oil Risk and Asset Returns: Evidence from Emerging Markets in the Middle East

In this paper, we investigate whether oil risk is priced in selected emerging markets of the Middle East region—in particular, oil-producing countries. Given that these countries have maintained fixed exchange rates against the U.S. dollar, we are able to modify the multivariate GARCH framework to include the oil-risk component. The results show that within the framework we adopt, the world market risk and oil risk are priced on all markets under investigation. The oil risk is highly significant in all markets, indicating that oil-risk exposure, to some extent, is nondiversifiable.

Reliability of Earnings Figures and Conservatism in Transitional Economies

Conservatism is one of the attributes of accounting quality. Conservatism is also one of the major reasons for international differences in financial reporting. The objective of this paper is to examine earnings quality proxied by earnings conservatism in transitional economies of Central and Eastern Europe, where financial reporting environment and accounting legislation has been changing rapidly. This is especially important because of fast changing economic and political environment of firms when these countries have joined European Union. Financial reporting had a minor role in planned economy. During transition towards market economy a great challenge for firms is to offer reliable and high quality accounting information to be able to attract non-governmental sources of finance. Reliability of financial reporting has been and still is a severe problem in these countries. Financial reporting practices have been closer to continental tradition, but lately accounting standards have been developed towards International Accounting Standards to meet the information needs of foreign investors. This study importantly contributes to the existing literature by examining earnings quality in transitional economies and especially, by focusing on the extent to which the stage of economic and political transition affects earnings quality. Our empirical results of analyzing listed companies in transitional economies of Central and Eastern Europe during the period from 1999 to 2005 show that there are differences in the degree of conservatism between countries at different stage of transition process.

Expected returns and idiosyncratic risk: Industry-level evidence from Russia

ABSTRACT We explore a relation between expected returns and idiosyncratic risk in Russia. Investors in the Russian stock market cannot fully diversify their portfolios due to transaction costs, information gathering and processing costs, and shortcomings in investor protection. This implies that investors demand a premium for idiosyncratic risk. We estimate the price of idiosyncratic risk using MIDAS regressions and a cross section of Russian industry portfolios. We find that idiosyncratic risk is economically significant and commands a negative (positive) premium, on average, of 10.0% (8.0) per year before (after) the global financial crisis in 2008. The results remain unaffected after controlling for global pricing factors and return reversal.

Foreign direct investments affecting accounting quality in transitional economies of Europe

This paper examines the effect of foreign direct investments (FDIs) on financial reporting quality in transitional economies. When moving from a planned economy towards a market-based economy, firms need to be able to attract more non-governmental financing. While still the quality of institutional structures is low, non-governmental financing comes in the form of FDI. Therefore, in a changed environment firms need to produce higher quality financial reporting to acquire capital. Accounting quality is measured as conditional conservatism, i.e., asymmetric recognition of gains and losses. In our study data from 12 transitional economies in Central and Eastern Europe is analysed. The results indicate that investment freedom, and freedom from corruption increase earnings quality. Moreover, the results show that high level of FDIs is associated with high conditional conservatism indicating that FDIs increase the incentives for high quality financial reporting, especially when the free flow of foreign capital is limited.