Assessing the effects of Long Run Stock Performance on Earnings Management
We evaluate monitory cost to explore the reasons and find that using venture capitalists as specialized investors with lower monitoring costs than other institutional investors, earnings management is less likely for low investor beliefs but more likely for high investor beliefs for VC backed firms relative to non VC backed firms. Numerous studies conclude that firms manage earnings upward prior to issuing equity Securities in an effort to minimize the dilution effect on existing shareholders (Theo, Welch and Wong, 1998a and 1998b) Erickson and Wang (1999) extend this line of reasoning to corporate mergers in which the acquiring firms pay for the target with stock. Similar to an equity offering for cash, they suggest that acquirers inflate earnings prior to the merger in order to increase stock prices, and thereby reduce the number of shares they must exchange in the stock swap. We can also obtain the same results as former study that auditor's quality negatively related with earnings management. Considering above consequence, we documents IPOs firms engaged in managing earnings with high investor beliefs have an influence on the long run abnormal stock return performance. These findings have implications for investors, firms, and accounting standard setters. More prudential monitory is important during market booming periods. We founded that firms have incentives to engage in earnings management before the announcement date of private equity offerings. The manipulation direction may be upward or downward according to the types of placement. Our empirical results indicated that management tended to manage reported earnings upward when the private placement was subscribed by non insiders; whereas management tended to downward manage earnings when the private placement was subscribed by insiders. (c) 2013 Elixir All rights reserved. Elixir Fin. Mgmt. 61 (2013) 16959 16962 Finance Management Available online at www.elixirpublishers.com (Elixir International Journal) Tele: E mail addresses: emamemostafa12@yahoo.com (c) 2013 Elixir All rights reserved Mehdi Azemi et al. Elixir Fin. Mgmt. 61 (2013) 16959 16962 16960 The mechanism between earnings management and investor beliefs Shedding more light on the study of investor psychology, behavioral finance clarifies that the behavior and decision of investors can affect the asset pricing and financial market and not influenced by company fundamentals. Great amount of account literature focus on the factors that determine reporting qualities and its function. Hodge(2003) investigate whether nonprofessional investor beliefs mirror the Securities and Exchange Commission's (SEC) concerns that earnings quality and auditor independence have declined over time. Perceived earnings quality for all publicly traded firm has declined over time, as has perceived auditor independence and the perceived reliability of audited financial information.as investors rely more on audited financial information, they find that information to be less reliable.one of the possible reason for the decline in the perceived reliability of audited financial information is the perceived decline in auditor independence. Lev and Zeroing (1999)focus on financial information to investors in comparison to the total information in the marketplace. Their evidence indicates that the usefulness of reported earnings, cash flows, and book (equity) values has been deteriorating over the past 20 years, whether driven by innovation, competition, or deregulation, the impact of change on firms' operations and economic conditions is not adequate reflected by the current reporting system. Some of scholar studied on how the incidence of fraud on corporate financial reporting is affected by investor beliefs about industry business conditions when raising external capital. Powel, Singh, and Winton (2007) predict that the incidence of fraud should be a hump shaped function of investor beliefs about business conditions, peaking when investors believe conditions are good, but not extremely good. By contrast, Hertzberg (2005) predicts that the incidence of fraud should simply increase as investor beliefs improve. In Hovel's literature, investor beliefs about business conditions influence investor monitoring intensity, which in turn affects managerial fraud incentives, whereas in Hertzberg (2005) more positive investor beliefs lead to more short term managerial compensation, which in turn exacerbates managerial fraud incentives. The 'Company Act' as well as 'Securities and Exchange Act' of Taiwan have been amended in October 2001 and January 2002 respectively. The amendment introduces a new way of capital raising private placement. This is especially important for companies that cannot obtain funds from public capital market. Private placement is preferred because of the following reasons: (1) small and newly established firms are relatively vulnerable to information asymmetry, and hence cannot raise capital from public capital market (2) firms that are facing financial stress will turn to private placement due to concerns of timeliness and risks (3) when firms intend to attract strategic investors, they also adopt private placement for the sake of convenience (4) family controlled companies tend to turn to private placement if they are confronting the risk of corporate control (Wu, 2000; Tan et al. 2002; Cronqvist and Nilsson, 2005) Based on that research, The objective of this research is to provide a more complete examination of the linkage between investor optimism and long run performance following private placements of equity. First, Tobin's q is employed in addition to book to market as a measure of growth opportunities and investor optimism. Wang, Winton, and Yu (2010; WWY, hereafter) examined the monitoring mechanism and compensation mechanism of manager's fraud and concludes that corporate fraud is likely to have negative externalities, particularly in the IPO market. "Widespread fraud can make investors averse to IPOs, depriving young firms of a critical source of funding, investors are more focused on finding good investments than on preventing fraud." They suggested fraud seems to peak in relatively good times, and even underwriter expertise is least effective in preventing fraud in such times, this suggests that regulators and auditors should be especially vigilant during booms" Our key objective is to test the relationship between investor belief and company's earnings management during IPOs. Here we use the result of DCA in part IV as the proxy of earnings management. We use Ind. We argue that investor over optimism should be evident only for firms that investors perceive to have high growth prospects. Conversely, limited investor optimism should prevail for firms not perceived as high growth firms. Even when their stocks are undervalued and subject to investor pessimism, these firms might be required to issue stock to maintain operating activities. EPS Growth and book building period as measurement of institutional Investor Beliefs. Based on the above finding, this paper further analyzes various scenarios in order to investigate earnings management. Our findings can be explained in two ways: From the perspective of the acquiring firm, management must estimate the value of the target with incomplete and inferior information to determine an offer price. The target can reject the bidder's offer if it is too low, but would be inclined to accept the offer if it is too high. Thus, the bidder risks overpayment for the target. The extent of information asymmetry likely depends on the characteristics of the target and the nature of the transaction. In this study, we focus on target listing status, target size, and industrial relatedness between bidders and targets as possible indicators of the bidder's pricing uncertainty and the incentives to engage in earnings management. when the offerees of private placement are not insiders, companies tend to upward manage earnings before the private placement announcement date; whereas when insiders are involved, companies tend to downward manage earnings before the private placement announcement date. The reasons may be due to insiders' self interest. Insiders can benefit, via downward earnings management, from depress the subscription prices of private placement. The above result indicates that the confusing effect of earnings management observed from private placement can be explained by two subsamples, namely, the one with insiders and the one without. The directions of earnings management from these two subsamples are exactly opposite. Moreover, we further investigate whether the magnitude of earnings manage ment of insiders that have subscribed all of the stocks from private placement is greater than that of the insiders that have subscribed only part of the stocks from private placement. We find that there is no statistical significant difference between these two subsamples. The two proxy of monitory cost are dummy variable, VC backed and Auditor's quality as mentioned in section 3.2. VC backed stands for whether firms backed by venture capital, (we calculate dummy variable as 1 if backed by VC, otherwise 0) We calculate the Auditor's quality dummy variable as 1, if firm's auditor belongs Mehdi Azemi et al. Elixir Fin. Mgmt. 61 (2013) 16959 16962 16961 to top 3 listed in panel D EPS stands for the change between IPO years t and the year before it (t 1) Based on former discussion, Investor Beliefs effect on the extent of earnings management. It can also reflect the fact that, investor belief about market influence manager's behavior to manage earnings, on the other hand, those consequence especially investor's optimistic and manager's fraud will effect on IPOs firm long run stock performance. In this section, we evaluate whether the IPOs firms which engaged managing earnings with the high investor beliefs have an influence on the long run abnormal stock return perfor