Earnings management and audit adjustments: An empirical study of IBEX 35 constituents

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Amat, Oriol; Elvira, Oscar; Platikanova, Petya. Earnings management and audit adjustments: An empirical study of IBEX 35 constituents. 2008
http://hdl.handle.net/10230/4574
To cite or link this document: http://hdl.handle.net/10230/4574
dc.contributor.author Amat, Oriol
dc.contributor.author Elvira, Oscar
dc.contributor.author Platikanova, Petya
dc.contributor.other Universitat Pompeu Fabra. Departament d'Economia i Empresa
dc.date.issued 2008-12-01
dc.identifier.uri http://hdl.handle.net/10230/4574
dc.description.abstract Doubts about the reliability of a company's qualitative financial disclosure increase market participant expectations from the auditor's report. The auditing process is supposed to serve as a monitoring device that reduces management incentives to manipulate reported earnings. Empirical research confirms that it could be an efficient device under some circumstances and recognizes that our estimates of the informativeness of audit reports are unavoidably biased (e.g., because of a client's anticipation of the auditing process). This empirical study supports the significant role of auditors in the financial market, in particular in the prevention of earnings management practice. We focus on earnings misstatements, which auditors correct with an adjustment, using a sample of past and current constituents of the benchmark market index in Spain, IBEX 35, and manually collected audit adjustments reported over the 1997-2004 period (42 companies, 336 annual reports, 75 earnings misstatements). Our findings confirm that companies more often overstate than understate their earnings. An investor may foresee earnings misreporting, as manipulators have a similar profile (e.g., more leveraged and with lower sales). However, he may receive valuable information from the audit adjustment on the size of earnings misstatement, which can be significantly large (i.e., material in almost all cases). We suggest that the magnitude of an audit adjustment depends, other things constant, on annual revenues and free cash levels. We also examine how the audit adjustment relates to the observed market price, trading volume and stock returns. Our findings are that earnings manipulators have a lower price and larger trading volume compared to their rivals. Their returns are positively associated with the magnitude of earnings misreporting, which is not consistent with the possible pricing of audit information.
dc.language.iso eng
dc.relation.ispartofseries Economics and Business Working Papers Series; 1129
dc.rights L'accés als continguts d'aquest document queda condicionat a l'acceptació de les condicions d'ús establertes per la següent llicència Creative Commons
dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
dc.title Earnings management and audit adjustments: An empirical study of IBEX 35 constituents
dc.type info:eu-repo/semantics/workingPaper
dc.date.modified 2014-06-03T07:14:23Z
dc.subject.keyword Finance and Accounting
dc.subject.keyword audit adjustments
dc.subject.keyword earnings management
dc.subject.keyword market pricing of audit information
dc.rights.accessRights info:eu-repo/semantics/openAccess


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