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- Title
The Relationship between Earnings Management and Equity Market Timing.
- Authors
da Costa Gomes, Matheus; Augusto Eça, João Paulo; da Costa Moraes, Marcelo Botelho; Ribeiro do Valle, Maurício
- Abstract
Objective: this study aims to verify if companies that practice equity market timing have higher earnings management levels around the stock issue period. Method: we used a sample of 68 seasoned equity offerings (SEOs) in Brazil from 2004-2015. First, we ranked the sample among companies that used market timing (timers) behavior in the SEOs and those that did not (non-timers). Second, we estimated each company's earnings management levels by the Modified Jones and Modified Jones with ROA models. Finally, we tested the relationship between earnings management and equity market timing using a linear regression model. Results: the results show that the timers managed earnings more intensively in the quarters around SEOs than the non-timers. This happens to increase net income and consequently improve profitability ratios. Therefore, to explore opportunity windows, managers can inflate accounting profit through accruals and influence the market's ability to correctly price shares. Conclusion: Brazilian companies practice earnings management as a way of exploiting opportunity windows in the stock market. The conclusion reinforces the need for a careful analysis of the company's profits by investors, analysts, auditors, and regulators while allowing efforts to avoid such practices through compliance, governance, and regulation.
- Subjects
BRAZIL; EARNINGS management; STOCK exchanges; MARKET timing; EQUITY management; SEASONED equity offerings; INSIDER trading in securities
- Publication
RAC: Revista de Administração Contemporânea, 2021, Vol 25, Issue 6, p1
- ISSN
1415-6555
- Publication type
Article
- DOI
10.1590/1982-7849rac2021200289.en