EARNINGS MANAGEMENT AND ECONOMIC VALUE ADDED IN CHINA, AFRICAN AND LATINAMERICAN MARKETS: A STUDY OF LOGISTICS MODEL, SUPPORT VECTOR MACHINES AND ROUGH SET THEORY

Year 2018, Volume: 5 Issue: 3, 305 - 320, 30.09.2018

Zhen-jia Liu

Abstract

Purpose-
This study to predict the association between earnings management and
EVA, evaluated it for accuracy.

Methodology-
This study through logistic regression model (excluding OLS
regression model), Support Vector Machines and Rough Set Theory

Findings-
Empirical results show that RST model exhibited
the highest accuracy in China and Africa
nations. SVM model exhibited the
highest accuracy in Latin-America nations.

Conclusion-
Our
results provide critical implications for managers, researchers, investors, and
regulators. Managers should analyze whether
EVA motivates managers to engage in earnings management behavior. For researchers, we adopted logit, SVM and RST model to
predict effect of earnings management on economic value added;
For investors, they can analyze the true value of enterprises, regardless of
whether enterprises have adopted earnings management. Regulators (e.g.,
governments) should establish stricter security measures and laws or rules for
listed firms to prevent earnings management following a financial tsunami and to encourage them to report their “real” true
value.

Keywords

Earnings management, economic value added, logistics model, support vector machines, rough set theory

References

• Abraham, R., Harris, J., Auerbach, J. (2017). Earnings yield as a predictor of return on assets, return on equity, economic value added and the equity multiplier. Modern Economy, 8,10-24.
• Ali, A., Zhang, W. (2015). CEO tenure and earnings management. Journal of Accounting and Economics, 59,60-79.
• Ali, S. M., Salleh, N. M., Hassan, M. S. (2008). Ownership structure and earnings management in Malaysian listed companies: the size effect. Asian Journal of Business and Accounting, 1(2),89-116.
• Alves, S. (2012). Ownership structure and earnings management: evidence from Portugal. Australasian Accounting, Business and Finance Journal, 6(1),57-74.
• Badertscher, B. A. (2011). Overvaluation and the choice of alternative earnings management mechanisms. The Accounting Review, 86(5), 1491-1518.
• Badolato, P. G., Donelson, D. C., Ege, M. (2014). Audit committee financial expertise and earnings management: the role of status. Journal of Accounting and Economics,58,208-230.
• Banderlipe, M. R. (2009). The impact of selected corporate governance variables in mitigating earnings management in the Philippines. DLSU Business & Economics Review, 19(1),17-27.
• Bhasin, M. (2012). Economic value added and corporate performance measurement: the portrait of a developing country. International journal of Contemporary Business Studies, 3(8),19-37.
• Bhojraj, S., Hribar P., Picconi M., McInnis. J. (2009). Making sense of cents: an examination of firms that marginally miss or beat analyst forecasts. Journal of Finance ,64(5), 2361-2388.
• Campa, D., Camacho-Miñano, M. M. (2015). The impact of SME’s pre-bankruptcy financial distress on earnings management tools. International Review of Financial Analysis, 42,222-234.
• Chen, L., Wang, S. Y., Qiao Z. (2014). Dupont model and product profitability analysis based on activity-based costing and economic value added. European Journal of Business and Management, 6(30),25-35.
• Chen, L., Qiao, Z. (2008). What influence the company’s economic value added? empirical evidence from china's securities market. Management Science and Engineering, 2(1),66-76.
• Chen, C. L., Huang, S. H., Fan, H. S. (2012). Complementary association between real activities and accruals-based manipulation in earnings reporting. Journal of Economic Policy Reform, 15(2),93-108.
• Chen, F., Chi, D., Wang, Y. (2015). Detecting biotechnology industry's earnings management using Bayesian network, principal component analysis, back propagation neural network, and decision tree. Economic Modelling, vol.23, pp.461-510.
• Chen, T. Y., Gu, Z. Y., Kubota, K., Takehara, H. (2015). Accrual-based and real activities based earnings management behavior of family firms in Japan. The Japanese Accounting Review,5,21-47.
• Chih, H. L., Shen, C.H., Kang, F. C. (2008). Corporate social responsibility, investor protection, and earnings management: some international evidence. Journal of Business Ethics, 79,179-198.
• Cohen, D. A., Dey, A., Lys, T. (2008). Real and accrual-based earnings management in the pre- and post-sarbanes-oxley periods. The Accounting Review, 83(3),757-787.
• Collins, D. W., Pungaliya, R. S., Vijh A. M. (2017). The effects of firm growth and model specification choices on tests of earnings management in quarterly settings. The Accounting Review, 92(2), 69-100.
• Cornett, M., Marcus, A., Tehranian, H. (2008). Corporate governance and pay-for-performance: the impact of earnings management. Journal of Financial Economics, 87, 357-373.
• Datta, S., Iskandar-Datta, M., Singh, V. (2013). Product market power, industry structure, and corporate earnings management. Journal of Banking and Finance, 37(8),3273-3285.
• Davidson, W., Xie, B., Xu, W., Ning, Y. (2007). The influence of executive age, career horizon and incentives on pre-turnover earnings management. Journal of Management & Governance, 11,45-60.
• Dechow, P., Sloan, R., Sweeny, A. (1995). Detecting earnings management. The Accounting Review,70,193-225.
• Dechow, P. M., Hutton, A. P., Kim, J. H., Sloan, R. G. (2012). Detecting earnings management: a new approach. Journal of Accounting Research, 50(2), 275-334.
• Destri, A. M. L., Picone, P. M., Minà, A. (2012). Bringing strategy back into financial systems of performance measurement: integrating EVA and PBC. Business Systems Review, 1(1),85-120.
• Dhole, S., Manchiraju, H., Suk, I. (2016). CEO inside debt and earnings management. Journal of Accounting, Auditing and Finance,31(4),515-550.
• Ding, Y., Zhang, H., & Zhang, J.(2007). Private vs state ownership and earnings management: evidence from Chinese listed companies. Corporate Governance, 15(2),223-238.
• Ebrahim, A. (2007). Earnings management and board activity: an additional evidence. Review of Accounting and Finance, 6(1),42-58.
• Feng, M., W. Ge, S. Luo., Shevlin, T. (2011). Why do CFOs become involved in material accounting manipulations. Journal of Accounting and Economics ,51,21–36.
• García-Meca, E., Sánchez-Ballesta, J. P. (2009). Corporate governance and earnings management: a meta-analysis. Corporate Governance: An International Review, 17(5),594-610.
• Gleason, C. A., Pincus, M., Rego, S. O. (2017). Material weaknesses in tax-related internal controls and last chance earnings management. The Journal of The American Taxation Association, 39(1),25-44.
• Gras-Gil, E., Manzano, M. P., Fernández, J. H. (2016). Investigating the relationship between corporate social responsibility and earnings management: evidence from Spain. Business Research Quarterly, 19,289-299.
• Hajabedi, S., Mousakhani, M., Orooji, A. (2016). Prediction of Economic Value Added status of Tehran Stock Exchanges by using Genetic Algorithm. Bulletin de la Société Royale des Sciences de Liège, 85,1102-1118.
• Healy, P. M., Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13(4), 365-383.
• Hochberg, Y. V. (2012). Venture capital and corporate governance in the newly public firm. Review of Finance, 16(2),429-480.
• Hoglund, H. (2012). Detecting earnings management with neural networks. Expert Systems with Applications, 39,9564-9570.
• Hsieh, C. l., Ren, Y., Lirely, R. (2016). Earnings management, executive compensation and layoffs. Academy of Accounting and Financial Studies Journal, 20(3),84-102.
• Huang, D. T., Liu, Z. C. (2011). The relationships among governance and earnings management: an empirical study on non-profit hospitals in Taiwan. African Journal of Business Management, 5(14),5468-5476.
• Huang, D. T., Liu, Z. C. (2010). Board composition and corporate value in Taiwan high technology firms. The International Journal of Organizational Innovation, 2(4),126-138.
• Huang, H-W., Mishra, S., Raghunandan, K. (2007). Types of non audit fees and financial reporting quality. Auditing: A Journal of Practice and Theory, 26(1), 133-145.
• Ifada, L. M., Wulandari, N. (2015). The effect of deferred tax and tax planning toward earnings management practice: an empirical study on nonmanufacturing companies listed in Indonesia stock exchange in the period of 2008-2012. International Journal of Organizational Innovation, 8(1), 155-170.
• Jones, J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, ,29,1-31.
• Lin, F. Y., Wu, S. F. (2014). Comparison of cosmetic earnings management for the developed markets and emerging markets: some empirical evidence from the United States and Taiwan. Economic Modelling, 36,466-473.
• Liu, C., Yuen, C. Y., Yao, L. J., Chan, S. H. (2014). Differences in earnings management between firms using US GAAP and IAS/IFRS. Review of Accounting and Finance, 13(2), 134-155.
• Liu, Z. J. (2016). Effect of earnings management on economic value added: a cross-country study. South African Journal of Business Management, 47(1), 29-36.
• Liu, Y., Ning, Y., Davidson III, W. N. (2010). Earnings management surrounding new debt issues. The Financial Review,45, 659-681.
• Lin, J. W., Hwang, M. I. (2010). Audit quality, corporate governance, and earnings management: a meta-analysis. International Journal of Auditing, 14, 57-77.
• Louis, H. (2004). Earnings management and the market performance of acquiring firms. Journal of Financial Economics, 74,121-148.
• Mahmoudi, S., Mahmoudi, S., Mahmoudi A. (2017). Prediction of earnings management by use of multilayer perceptron neural networks with two hidden layers in various industries. Journal of Entrepreneurship, Business and Economics, 5(1), 216-236.
• Maitah, M., Saleem, N., Malec, K., Boubaker, M., Gouda, S. (2015). Economic value added and stock market development in Egypt. Asian Social Science, 11(3),126-134.
• Manorselvi, A., Vijayakumar, A. (2007). Performance of Indian automobile industry: economic value added approach. Management and Labour Studies, 32(4),451- 467.
• Martani, D., Saputra, Y. E. (2009). The impact of corporate governance to the economic value added listed company in BEI 2003-2004. China-USA Business Review, 8(3),26-40.
• Matsumoto, D. A. (2002). Management’s incentives to avoid negative earnings surprises. Accounting Review,77,483-514.
• Mitani, H.(2010). Additional evidence on earnings management and corporate governance. FSA Research Review, 6,1-22.
• Mizik, N. (2010). The theory and practice of myopic management. Journal of Marketing Research,47,594–611.
• Noor, R. M., Mastuki, N., Aziz, Z. (2007). Earnings management and deferred tax. Malaysian Accounting Review, 6(1), 1-17.
• Peni, E., Vahamaa, S. (2010). Female executives and earnings management. Managerial Finance, 36(7),629-645.
• Phan, H. V., Khieu, H. D., Golec, J. (2017). Does earnings management relieve the negative effects of mandatory pension contributions. Financial Management, spring, 89-128.
• Piot, C., Janin, R. (2007). External auditors, audit committees and earnings management in France. European Accounting Review, 16(2),429-454.
• Pourhasan, R. A. A., Mansour, G. (2014). Comparison of earnings management prediction using neural networks model and modified linear Jones model. Asian Journal of Research in Social Sciences and Humanities, 4(7),456-465.
• Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42(3),335-370.
• Saha, A., Ahmad, N. H., Yeok, S. G. (2016). Evaluation of performance of Malaysian banks in risk adjusted return on capital (RAROC) and economic value added (EVA) framework. Asian Academy of Management Journal of Accounting and Finance, 12(1), 25-47.
• Shil, N. C., Das, B. (2012). Right product pricing: application of activity-based costing (ABC)-and- economic value added (EVA) as an integrated tool. African Journal of Business Management, 6(44),10826-10833.
• Shiri, M. M., Salehi, M., Bahrami, M. (2013). Prediction of economic value added of Iranian listed companies. СОВРЕМЕННАЯ ЭКОНОМИКА: ПРОБЛЕМЫ, ТЕНДЕНЦИИ, ПЕРСПЕКТИВЫ,9,45-55.
• Stewart, G. B. (1991). The quest for value. New York: Harperbusiness.
• Teker, D., Teker, S., Sönmez, M. (2011). Economic value added performances of publicly owned banks: evidence from Turkey. International Research Journal of Finance and Economics, 75,132-138.
• Tsai, C. F., Chiou, Y. J. (2009). Earnings management prediction: a pilot study of combining neural networks and decision trees. Expert Systems with Applications, 36,7183-7191.
• Victoria, I. A. O., Kamoche, K. (2016). An assessment of the adoption of economic value added (EVA) as a performance measure in the Kenya insurance industry. International Journal of Finance and Accounting, 1(1),107-124.
• Vijaykumar, A. (2010). Economic value added and market value added: an empirical study of relationship. College Sadhana, 2(2),141-148.
• Wang, Y. S., Jiang, X., Liu, Z. J., Wang, W. X. (2015). Effect of earnings management on economic value added: a China study. Accounting and Finance Research,4,(3),9-19.
• Wang, Y., Wang, Y. (2016). Economic value added, corporation growth and overinvestment-based on state-owned corporations. Modern Economy, 7,1640-1652.
• Wu, R. S. (2014). Predicting earnings management: a nonlinear approach. International Review of Economics and Finance, 30, 1-25.
• Zang, A. Y. (2011). Evidence on the tradeoff between real manipulation and accrual manipulation. The Accounting Review, 87(2),675-703.
• Zhao, X., Wang, T. (2012). Economic value added for performance evaluation: a financial engineering. Systems Engineering Procedia, 5,379-387.
• Zhou, Z., Wu, C. F. (2016). Consistent analyst expectation error and earnings management: evidence from China. Emerging Markets Finance & Trade, 52,2128-2148.
• Zhu, T., Lu, M., Shan, Y., Zhang, Y. (2015). Accrual-based and real activity earnings management at the back door: evidence from Chinese reverse mergers. Pacific-Basin Finance Journal,.35(A), 317-339.