عنوان مقاله [English]
نویسندگان [English]چکیده [English]
Journal of Accounting Advances (J.A.A)
Vol. 4, No. 2, 2012, Ser. 63/3
High Valuing of Equity and Discretionary Accruals
Islamic Azad Univeristy, Neishabur Branch
Dr. M. H. Vadiee
This research investigates the relation between overvaluing of equity and discretionary accruals. The statistical population was taken from listed companies in Tehran Stock Exchange, and sample of 86 listed companies was surveyed.
High value of equity provides a strong incentive for managers to report earnings that do not disappoint the market. Jensen (2005) argued the overvalued firms can suffer from adverse consequences because of extreme valuation that encourages managers to act in ways that are detrimental to the long run value of their firms. For example when a firm becomes more overvalued, the pressure to meet increasingly unrealistic earnings targets becomes greater. We use two measures to identify overvalued firms: a) the price-earnings ratio and b) abnormal return. We stratify firms into three classes based on a procedure using both high prior-year P/E ratio and high prior-year abnormal return. Firms in highest class are classified as highly valued and are predicted to have higher future discretionary accruals.
In summary, we hypothesize that an unusually high P/E ratio or unusually high prior-year abnormal return provides a manager with strong incentives to meet the implied market expectation for earning.
In this research we posit the following hypotheses,
H1: Highly valued firms (firms with both high prior-year P/E ratio and high prior-year abnormal returns) will exhibit higher current year discretionary accruals levels relative to firms with lower valuations.
H2: The inverse relationship between operating cash flow and discretionary accruals has higher R square for highly valued firms than firms with lower valuations.
In this study we used three procedures for testing of hypothesis: a) Regression models, b) Independent- sample T- Test that compares means for two groups of cases and c) Bivariate Correlation that computes Pearson's correlation coefficient.
The results of hypotheses test are represented as follows:
First hypothesis has tested in two procedures:
1- Independent sample T-Test: results of comparing average discretionary accruals in highly valued firms and firms with low valuation indicate the average discretionary accrual is higher in highly valued firms than firms with low valuation; therefore, first hypothesis is accepted.
2- Application of regression models:
Results of investigating of regression model indicate that the highly valuing variable is confirming.
Second hypothesis has tested in two procedures too:
1- Bivariate correlation: in this procedure for testing of second hypothesis the Pearson correlation coefficient has been computed for two groups of firms and results indicate: a) the relation between operating cash flow and discretionary current accruals is inverse and b) quantity of this coefficient is more negative in highly valued firms than firm with low valuation but although the negative coefficients quantity indicates inverse relation in highly valued, it isn’t statistically significant at the 5% level; therefore, the second research hypothesis is not conforming.
2- The regression model: The results of investigating of model coefficients indicate although the negative coefficients quantity of interaction term HV*OCF indicates a strong inverse relation in highly valued, it isn’t statistically significant at the 5% level.
Discussion and Conclusion
This paper provides evidence consistent with over valuation hypothesis that predicts that managers of highly valued firms have strong incentives to manage earnings up wards. The evidence suggests that high valuation increases the likelihood of earning management. Our results suggest that prices can drive accruals in contrast to the typical model where accruals drive price.
One implication for directors is that they should be particularly conscious of potential earnings manipulation when their firms have extremely high valuation multiples.