ACCT 455 Lecture Notes - Lecture 21: Credit Risk, Earnings Management, Linkedin
26 May 2016
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Healy"s (cid:271)o(cid:374)us stru(cid:272)ture hypothesis: going below could violate debt covenants, good example. Meeti(cid:374)g i(cid:374)(cid:448)estors" ear(cid:374)i(cid:374)gs expectations: companies report smooth growth in earnings, they get appreciated by the market. Even more so, for growth companies: linkedin reported earnings a few weeks ago, and their stocks dropped 60%! (severe punishment for reporting a drop in earnings) Investors tend to focus more on short term. 3 benchmarks for companies to deliver on: avoiding small loss, avoiding earnings decrease, a(cid:448)oidi(cid:374)g (cid:373)issi(cid:374)g a(cid:374)alysts" fore(cid:272)asts. Dechow et al. (2003): over time importance of thresholds shifted from avoiding loss to a(cid:448)oidi(cid:374)g (cid:373)issi(cid:374)g a(cid:374)alysts" fore(cid:272)asts. Myers et al. (2007): abnormally high proportion of firms with 20 or more consecutive quarters of eps increase: a(cid:374)alysts" fore(cid:272)asts became the main benchmark that investors cared about for companies to meet. Ipo firms have positive discretionary accruals: the accruals are negatively correlated with future operating performance and future stock returns. What does this suggest: eventually those accruals reverse.
