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Essays in Earnings Management

Malikov, Kamran (2016) Essays in Earnings Management. PhD thesis, University of Essex.

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Abstract

This thesis examines three essays in earnings management using UK-based data samples. The first essay implements a first test of the debt covenant hypothesis for the UK. The results indicate that firms close to violation or in technical default of their interest coverage (debt to EBITDA) covenants engage in higher levels of RAM relative to firms far from violation. Mandatory IFRS adoption does not change the use of RAM for firms close to violation or in technical default of their interest coverage covenants. However, it increases the propensity for employing RAM for firm close to default of their debt to EBITDA covenants. The second essay examines the effect of seasoned equity offerings (SEOs) on the debt covenant hypothesis. It finds that the use of RAM to avoid the possibility of interest coverage covenant violations decreases from the pre-issue period to the post-issue period. The results also show that the decrease in the use of RAM in the post SEO period to avoid the likelihood of breaching interest coverage covenant is more pervasive among SEO firms with low market to book ratios or high financial leverage. The third and final essay investigates revenue reclassification as an earnings management tool. More specifically, it examines whether firms use revenue reclassification by shifting other revenues to core revenues. The results establish that firms engage in revenue reclassification to inflate core revenues. They indicate that the period following mandatory IFRS adoption is associated with an increase in this practice as IRFS offers more latitude for revenue reclassification. Further tests reveal that revenue reclassification is more pervasive among firms with high incentives for earnings management such as those conducting seasoned equity offerings, those in financial distress, those with acquisitions financed by share for share exchange, and those reporting low core earnings or small increases in core earnings.

Item Type: Thesis (PhD)
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School
Depositing User: Kamran Malikov
Date Deposited: 10 Nov 2016 14:58
Last Modified: 10 Nov 2016 14:58
URI: http://repository.essex.ac.uk/id/eprint/17918

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