Managerial discretion in distressed firms

This study examines the earnings management behaviour of 455 distressed US firms that filed for bankruptcy during the period 1986-2001. We examine (a) possible earnings management during the years prior to bankruptcy-filing, (b) whether qualified audit opinions cause conservative earnings management behaviour, (c) whether earnings management differs between firms that discontinued operations and firms that survived thereafter, and (d) the effect of earnings management on subsequent stock returns. Our results are consistent with downwards earnings management 1 year prior to the bankruptcy-filing. Results also show that (a) firms receiving unqualified audit opinions 4 or 5 years prior to the bankruptcy-filing event manage earnings upwards in subsequent years, consistent with Rosner [2003. Earnings manipulation in failing firms. Contemporary Accounting Research 20, 361-408], (b) more conservative earnings management seems to be related to the qualified audit opinions rendered in the preceding year, (c) firms with long-term negative accruals the year of bankruptcy-filing have a greater chance to survive thereafter, and (d) more pronounced (negative) earnings management is associated with more negative (next year's) subsequent returns. © 2007 Elsevier Ltd. All rights reserved.

Negative assimilation:how immigrants experience economic mobility in Japan

This paper examines the economic mobility of foreign migrants in Japan. In a country that is largely regarded as homogeneous and closed to outsiders, how and to what extent do immigrants achieve economic success? A survey conducted by the authors revealed that the conventional assimilationist perspective does not fully explain immigrants’ economic success in Japan. Migrants from the West experience what Chiswick and Miller (2011) refer to as “negative assimilation.” That is, their earnings decline over time in Japan. While negative assimilation was not clearly observed among immigrants from neighboring Asian countries, wages among them did not increase with the length of their stay in Japan. For both groups, the skills they brought from abroad were found to be largely accountable for their economic success, while locally specific human capital, such as education acquired in the host society, did not contribute to their earnings.

Earnings behaviour of financially distressed firms:The role of institutional ownership

Using a sample of 859 U.S. bankruptcy-filing firms over the period 1986-2004, we examine the earnings behaviour of managers during the distressed period by looking at sources of abnormal accruals prior to the bankruptcy-filing year. Results show that managers of highly distressed firms shift earnings downwards prior to the bankruptcy filing. We test and provide evidence in support of two potential contributing factors. First, top-level management turnover among distressed firms leads new managers to earnings bath choices during the distressed period. Second, qualified audit opinions exert pressure on managers to follow more conservative earnings behaviour during the distressed period. Evidence is also provided that the management of distressed firms with lower (higher) institutional ownership has greater (lesser) tendency to manage earnings downwards. Results also show that higher institutional ownership mitigates the negative abnormal returns of firms with top management turnover. To the authors' knowledge, this is the first study that attempts to examine whether institutional ownership relates to market reaction in conjunction with a top management turnover or a qualified audit opinion during the distressed period. Prior studies focused on the investigation of earnings management or institutional ownership (separately) during the distressed period, but did not examine if the effect of institutional ownership on earnings behaviour also influences subsequent returns. Thus, the results of this study should be of interest to analysts, standard setters and regulatory bodies since our results show that management turnover, qualified audit opinions and firm governance mechanisms affect the quality of earnings and the level of abnormal returns. © 2007 Accounting Foundation, The University of Sydney.

Putting service relations to the test:how can negative consumer reactions of price increases be reduced?

Price increases seem to be an adequate way to improve the earnings of companies. This fact becomes especially crucial because of increased price competition in many markets. Price increases might lead to negative customer reactions, such as a lower perceived utility or a lower loyalty intention. Therefore, the question for managers remains how prices can be increased without losing customers. Results of our experimental study suggest that customers of energy suppliers rate the perceived utility of the offer relatively better when the price increase is combined with an additional modification of the product or accompanied by a new service. It becomes clear that intensifying service relations can offset the negative effects of price increases.

Losses, dividend reductions, and market reaction associated with past earnings and dividends patterns

This paper examines investors' reactions to dividend reductions or omissions conditional on past earnings and dividend patterns for a sample of eighty-two U.S. firms that incurred an annual loss. We document that the market reaction for firms with long patterns of past earnings and dividend payouts is significantly more negative than for firms with lessestablished past earnings and dividends records. Our results can be explained by the following line of reasoning. First, consistent with DeAngelo, DeAngelo, and Skinner (1992), a loss following a long stream of earnings and dividend payments represents an unreliable indicator of future earnings. Thus, established firms have higher loss reliability than less-established firms. Second, because current earnings and dividend policy are a substitute source of means of forecasting future earnings, lower loss reliability increases the information content of dividend reductions. Therefore, given the presence of a loss, the longer the stream of prior earnings and dividend payments, (1) the lower the loss reliability and (2) the more reliably dividend cuts are perceived as an indication that earnings difficulties will persist in the future.