Comparison of the Companies on the BIST Sustainability Index with Other Listed Companies in the Context of Earnings Manipulation

Year 2022, , 399 - 416, 30.12.2022

Asuman Atik Yıldırım , Iva Kovacevic

https://doi.org/10.26650/ibr.2022.51.868826

Abstract

The concept of sustainability has been gaining importance all over the world. Concerns of consumers, investors, fund providers and governmental organizations about sustainability motivate companies to take action for a more sustainable world. Stock exchanges have also created sustainability related indices. The starting point of this study is the assumption that companies in the sustainability index are more respectful to the environment, society and economy and therefore, they are also more trustworthy when presenting their earnings. Earnings manipulation was detected by using the Beneish Model (1999). The M-scores of BIST non-financial firms were calculated for the years 2017 (262 firms) and 2018 (261 firms). The results showed that nearly half of the sample firms were possibly manipulators in both years. Additionally, nearly 40 percent of the firms on the sustainability index were manipulators. Although the percentage of manipulating firms in the sustainability index is lower compared to the percentage of manipulators in all firms, according to the results of statistical tests, there is no significant difference between the earnings manipulation behaviours of companies in the sustainability index and those not in the index.

Keywords

Sustainability, Sustainability index, BIST, Earnings manipulation, Beneish model

References

• Al-Baidhani,A.M., Abdullah, A., Ariff, M., Cheng, & F.F., Karbhari, Y. (2017). Review of earnings response coefficient studies. Corporate Ownership & Control, 14 (3), 229-308.
• Alexopoulos, I., Kounetas, K., Tzelepis, & D. (2018). Environmental and financial performance. Is there a win-win or a win-loss situation? Evidence from the Greek manufacturing. Journal of Cleaner Production, 197, 1275-1283.
• Barua, A., Kim, J.H., & Yi, S. (2019). Hierarchy of earnings thresholds based on discretionary accruals. Advances in Accounting, 44, 29-48.
• Beneish, M.D. (1999). The Detection of Earnings Manipulation, Financial Analysts Journal, 55 (5), 24-36.
• Chen, Y.S., Chiu, S.C., Lin, S., & Wu, K.H. (2019). Corporate social responsibility and income smoothing: Supply chain Perspectives. Journal of Business Research, 97, 76–93.
• Chepurko, I., Dayanandan, A., Donker, H., & Nofsinger, J. (2018). Are socially responsible firms less likely to restate earnings? Global Finance Journal, 38, 97-109.
• Chih, H.,C., Shen, & Kang, F. (2008). Corporate social responsibility, investor protection, and earnings management: Some international evidence. Journal of Business Ethics, 79 (1/2), 179-198.
• Christianto, W., and Budiharta, P. (2014). The effect of earnings manipulation with using m-score on stock return . Jurnal Ekonomi Akuntansi, 1-13.
• Dimitrijevic, D., Milutinović, S., & Obradović, V. (2018). Indicators of Fraud in Financial Reporting in the Republic of Serbia, Teme 17 (4), 1319-1338.
• Ferri, L.M., & Pedrini, M. (2018). Socially and environmentally responsible purchasing: Comparing the impacts on buying firm's financial performance, competitiveness and risk. Journal of Cleaner Production, 174, 880-888.
• Franceschetti, B.M., & Koschtial, C. (2012). Do bankrupt companies manipulate earnings more than the non-bankrupt ones? Journal of Finance and Accountancy, 12, 1-22.
• Gao, L., & Zhang, J.H. (2015). Firms’ earnings smoothing, corporate social responsibility and valuation. Journal of Corporate Finance, 32, 108–127.
• Gargouri, R.M., Francoeur, C., & Shabou, R. (2010). The Relationship between Corporate Social Performance and Earnings Management. Canadian Journal of Administrative Sciences, Revue canadienne des sciences de l’administration, 27, 320–334.
• Guerard, J.B., Jr. (1997). Is There a Cost to Being Socially Responsible? Journal of Investing, 6, 11-18.
• Halbrook M. B. (2013). Corporate social responsibility and earnings response coefficients. Journal of Finance and Accountancy, 1-22.
• Henao, R., Sarache, W., & Gomez, I. (2018). Lean manufacturing and sustainable performance: Trends and future challenges. Journal of Cleaner Production, 208, 99-116.
• Hong, Y. & Andersen, M.L. (2011). The Relationship Between Corporate Social Responsibility and Earnings Management: An Exploratory Study. Journal of Business Ethics, 104 (4), 461-471.
• Jackson, L.A., & Singh, D. (2015). Environmental rankings and financial performance: An analysis of firms in the US food and beverage supply chain. Tourism Management Perspectives, 14, 25-33.
• Kamal, M.E.M., Salleh, M.F.M. & Ahmad, A. (2016). Detecting Financial Statement Fraud by Malaysian Public Listed Companies: The Reliability of the Beneish M-Score Model. JurnalPengurusan, 46, 23 – 32.
• Khalil, M., & Simon, J. (2014). Efficient contracting, earnings smoothing and managerial accounting discretion. Journal of Applied Accounting Research, 15 (1), 100-123.
• Kim, Y.C., Seol, I., & Kang, Y.S. (2018). A study on the earnings response coefficient (ERC) of socially responsible firms: Legal environment and stages of corporate social responsibility. Management Research Review, 41 (9), 1010-1032.
• Kokić, T., Gligorić, M. & Knežević, G. (2018, January). Use of Beneish model on Serbian super league football clubs. Accounting, Audit and Forensic Science, FINIZ Conference, 118-122.
• Luzzini, D., Jones, E.B., Jones, A.B., & Spina, G. (2015). From sustainability commitment to performance: The role of intra-and inter-firm collaborative capabilities in the upstream supply chain. International Journal of Production Economics, 165, 51-63.
• Manchiraju, H. & Rajgopal, S. (2017). Does Corporate Social Responsibility (CSR) Create Shareholder Value? Evidence from the Indian Companies Act 2013. Journal of Accounting Research, 55 (5), 1257-1300.
• Mena, J.A., Hult, G.,T.,M., Ferrell, O.C., & Zhang, Y. (2019). Competing assessments of market-driven, sustainability-centered, and stakeholder-focused approaches to the customer-brand relationships and performance. Journal of Business Research, 95(C), 531-543.
• Mohd S.I., Faizah D., Haslinda Y., & Rusnah M. (2015). Analysis of Earnings Management Practices and Sustainability Reporting for Corporations that offer Islamic Products & Services, 7th International Conference on financial criminology April 2015, Wadham College, Oxford, United Kingdom, Procedia Economics and Finance, 28, 176 – 182.
• Naidoo, M., & Gasparatos, A. (2018). Corporate environmental sustainability in the retail sector: Drivers, strategies and performance measurement. Journal of Cleaner Production, 203, 125-142.
• Ngo, A.D., & Varela, O. (2012). Earnings smoothing and the underpricing of seasoned equity offerings. Managerial Finance, 38 (9), 833-859.
• Oberndorfer, U., Schmidt, P., Wagner, M., & Ziegler, A. (2013). Does the stock market value the inclusion in a sustainability stock index? An event study analysis for German firms. Journal of Environmental Economics and Management, 66, 497–509.
• Orsato, R.J., Garcia, A., Mendes-Da-Silva, W., Simonetti, R., & Monzoni, M. (2015). Sustainability indexes: why join in? A study of the ‘Corporate Sustainability Index (ISE)’ in Brazil. Journal of Cleaner Production, 96, 161-170.
• Özcan, A. (2018). The Use of Beneish Model in Forensic Accounting: Evidence from Turkey. Journal of Applied Economics and Business Research, 8 (1), 57-67.
• Petrík, V. (2016). Application of Beneish M-score on selected financial statements. Bezpečne Slovensko a Europska Unia, At Košice, Slovakia - The University of Security Management in Košice, 2, 307-311.
• Prior, D., Surroca J. & Tribó, J.A. (2008). Are Socially Responsible Managers Really Ethical? Exploring the Relationship between Earnings Management and Corporate Social Responsibility. Journal compilation, 16 (3), 160-177.
• Przychodzen, W., Gomez-Bezares, F., & Przychodzen, J. (2018). Green information technologies practices and financial performance-The empirical evidence from German publicly traded companies. Journal of Cleaner Production, 201, 570-579.
• Repousis, S., (2016). Using Beneish model to detect corporate financial statement fraud in Greece. Journal of Financial Crime, 23 (4), 1063-1073.
• Rezaee, Z. & Tuo, L., (2019). Are the Quantity and Quality of Sustainability Disclosures Associated with the Innate and Discretionary Earnings Quality? Journal of Business Ethics, 155 (1), 763-786.
• Santis, P., Albuquerque, A., & Lizarelli, F. (2016). Do sustainable companies have a better financial performance? A study on Brazilian public companies. Journal of Cleaner Production, 133, 735-745.
• Talab H., Ibrahim Ali S., & Hammood H., (2018). Role of Beneish M-score Model in Detecting of Earnings Management Practices: Empirical Study in Listed Banks of Iraqi Stock Exchange. International Journal of Applied Business and Economic Research, 15 (23), 287-302.
• Tarjo, Herawati, N. (2015, September). Application of Beneish M-Score Models and Data Mining to Detect Financial Fraud, 2nd Global Conference on Business and Social Science, GCBSS-2015, 17-18 September 2015, Bali, Indonesia
• Tucker, J.W. & Zarowin, P.A. (2006). Does Income Smoothing Improve Earnings Informativeness? The Accounting Review, 81 (1), 251-270.
• Warshavsky, M. (2012). Analyzing earnings quality as a Financial Forensic Tool. FVLE, 39, 16-20.
• Xiao, C., Wang, Q., Vaart, T., & Donk, D.P. (2018). When Does Corporate Sustainability Performance Pay off? The Impact of Country-Level Sustainability Performance. Ecological Economics, 146, 325-333.