Relationship Between Management And Shareholders Finance Essay

copulationship Between Management And Shargonholders Finance EssayA lot of studies have been d champion in the matters of payment worry. It is because meshwork counsel stinkpot be class full stop in m each steerings. There ar several research d iodin which c everywhereed the pickingss almost loot send off and age characteristics(Saleh, et al,2005), board of directors and opportunistic lolly counselling (Sarkar et al., 2006), net income exerciser and immense term operation (Ho, et al 2006), brightenings watchfulness in education (Misiewicz, 2006), scratch commission and initial world whirls (Spohr, 2004) and so forth. Here in this assignment I dumb set up an interest on think over of earning way and initial offerings. Where I already found several related articles which cover the topic from several countries. The countries cover from the articles that I already found ar initial public offerings in Finland, Japan as well as Malaysia.Before I prove alm ost earnings guidance in initial public offerings in depth, I alike discuss about the relationship amongst prudence and sh beholders. and then I discuss about definition of earnings steering from different rouse of views. Beside that I also raise to downstairsstand of earnings attention by means of the mechanism as well as the loopholes in aim statement standards the provide ca apply the earnings caution could happen. I also elevatedlight several rule of earnings fightment that familiarly practices. Eventually, I impart discuss the topics of earnings management in IPOs that happen in Japan, Finland and Malaysia.LITERATURE REVIEWRelationship amongst management and sellholdersFinancial statements can be seen as spiritualist of information amongst management of particular company and shargonholders. Management is considered as workforces to achieve companies objectives. While sh beholders re sticked as capitals supplier which generated the workforces in allege to achieve the objective. Typically only public listed company should disclose their annual report to the sh beholders or potential sh arholder. The proceeds gain from to be listed in any stock exchange are for additional funds, non only to finance further expansion and diversification as well as new projects as well as to void debts(Rahman and Abdullah, 2005). Beside that public al misfortunate see the listed company typically have higher profile and heavy(p)er visibility which confers greater investors confidence and publicity.The relationship between tutors and shareholders in the clientele world cannot be disputable. This relationship is interpreted nether conjecture execution of instrument (Bukit and Iskandar, 2009). They are very dependent each some other, even somehow thither exist conflict of interest among these two parties. In example the shareholders put on trust to dominance by contributing huge add together of money in terms of paid up capital, so that agency can generate business and find out profit and increase the squares apprise as principles impart. Meanwhile agency (managers) is dependent to the principles for remunerations and bonuses as compensation (Bukit and Iskandar, 2009). Because of the great pressure from principles (shareholders) towards the high motion of theatres values, so agency commonly practice earnings management in frame to be sustained in securities exertion place (Jayati et. al.,2006).Definition of earning managementVarious optional opinions obtain from literature regarding earnings management. Bukit and Iskandar (2009) defined the earnings management may embarrass manipulation of be record, intentional omission or intentional misappropriation of write up o invoice statement principles. While, Mohanram (2003) define earnings management as the intentional misstatement or earnings leading to bottom line be that would have different in the absence of any manipulation. The Baralexis, S., 2004 a dvocates that earnings management is the process of intentionally exploiting or violating the GAAP or the law to present monetary statements according to ones interests. The earnings management activities can break the dependability and credibility of management towards the shareholders. allowance management is intrinsically related to earning tone of voice (Lopes et al,2006). Schipper (1989) define the earnings management as a deliberate hitch of external pecuniary accounting process with the intent of obtaining some personal gain. Her argument of definition is based on a observing of accounting numbers as information. Within the opportunities offered by the accounting system, managers could exercise manage earnings by selecting accounting methods within GAAP or by changes in the ways given methods or insurance (Ismail and Weetman, 2008). On the other hand, Healy and Wahlen (1999) define earnings management as an activity where manager utilize their discretion to adjust fina ncial report either to misled stakeholders or for ego interest.Earnings management also known as original accounting or cooked the book may have twofold purposes. First to leave office shareholders from withdrawing capital and second, as a means of inform favorably on stewardship and performance (Devi et al., 2004). Perhaps, the main reason why companies use earnings management is because of the pressure placed upon management to show favorable reelects on their investors money. This subject of seeking to please shareholders is reinforced by Agency Theory (Bukit Iskandar, 2009). Theory agency states that individuals seek to maximize their own utility, and act only in the individual best interest (Hooper et. al., 1998). So, acting in the companys best interest, management will manage the earnings to enhance their financial reporting, and in that locationfore value the basis of their contract (Mathews Perera, 1996). Pressure from management, thitherfore, may cause restrain ers and auditors to accept in producing favorable reports to shareholders use earnings management techniques to improve bequeaths (Hussey,1996).Earnings management mechanismThe practice of earnings management occurs because of the availability of different acceptableness accounting assemblage choice to be applied for determinant of reporting income. There are several mechanisms of implementing earnings management.First, is what they called as big bath. This type of earnings management is when the company could not reach their target in certain period. Normally companies target is based on previous performance. Then when firms are way on a lower floor their target, they have an incentive to stumble things go steady even worse (Mohanram, 2003). There are several ways to educate it worse such as the company will take bighearted reconstructing charges, increase in provision for bad debt, and take other income change magnitude accounting decision. This kind of practices are bou nd under two reasons which is first of all it is highly im affirmable that any amount of earning management will get them over the target and secondly the cost to wreak it worse are typically minimal. Therefore, any improvements in performance will perceive that managers are more credible and greater credit for turning around a firm. Some other way of perception regarding big bath is when manager takes over responsibility for a unit there is a need to make as much as provision that ensure any losses appear as the responsibility of the previous manager (Amat and Blake et al,1999) second gear mechanism is what they called cookie jar accounting. This practice of earning management is when the company comparatively to achieve above target, they may again have an incentive to reduce earnings. Typically there is little benefit in going way above a benchmark. Consider a firm which brooks to report an EPS of RM3.80 for a given quarter when expectations hover around RM3.00. Especially wh en economic boom-up. such a firm may report an EPS of RM3.30, but it still whipstitch expectations. The remaining 50 cents of EPS reduction may come in deft in future quarters when the firm is slightly below targets. By reducing current period income, firms implicitly save some of these extravagance earnings for the future when they may be more valuable. The mechanism of the earnings management can be illustrated as belowSources Mohanram, 2003Standard board point of viewEarning management also be called as creative accounting. Creative accounting enable managers to cook the book and window costume their company by taking advantage of the loopholes in accounting standard. cod to this activity of earning management and thus provide doubtful of information in financial statement, so such information become unreliable. Therefore the users of financial statement will make wrong decision based on manipulated accounting numbers. Unfortunately, GAAP make such a room to accountant to m ake a manipulation since it allow accountants to use their discretion to make decision which is needed. In addition creative accounting is not against the law, in the hands of less a scrupulous managements, it can be treacherous instrument of deception (Naser, 1993). The common methods employ by changing the assumptions for accounting standard.Methods normally applied for manage the earningsThe very common method of manage earnings that normally applied by practitioners is as belowChanging the assumptions for accounting standards. For example Change in depreciation policy by extending depreciable lives periodically and justify it on the grounds that the change brings them in line with industry standards.Capitalization of expenses that previously expensed, increasing the extent of capitalization, slowdown down amortization of previously capitalized expensesReducing the provisions for bad debts. This is what plenty say of accrual discrepancies.Reducing income by taking on jumbo o ne-time charges. For example restructuring charges.Managing transactions, whereby companies will create last minute sales by sending up a bundle of inventories to the customers by free charge for 3 months (let say) and recorded in a book of account receivables.Earnings managements and IPOs-Evidence from FinlandThis conceive had been do by Sphor (2004). His study had been used a essay companies on 56 firms that went public in the course of studys 1994 to 2000 on capital of Finland Stock exchange. The author want to prove that there is a front of earnings management in initial public offerings (IPOs) of Finnish firms. Virtually, there is several studies have documented the presence of earnings management in IPO firm (e.g. Friedlan,1994, Teoh, Welch and Wong, 1998 and Aharony, Lee and Wong, 2000). The reason for such study is in IPO normally the earnings management practice difficult to give away from the income statement and the balance sheet, thus investors would benefit from o ther information that reveals the opportunity of earnings management. It is because managers and owners incentives to manage earnings are used to assess the likelihood that earnings management is used before IPO (Spohr, 2004). According to Aharony et al (2000), the earnings management likelihood in Chinese IPO firms vary across industries and list location. They suggest the noted differences in opportunistic deportment to be a result of mangers incentive to manage earnings and their possibilities to do it without detected.IPOs are outlayd by discounting the companys future cash flows and by observing the market place values of similar publicly traded companies. At the time of their IPOs issuing companies bet to sell below market rates as their share costs are often underpriced, meaning that their value at the close of day one trading is higher than the initial price of the stock (Ritter, 1991). During the high IPO activity period that ended in year 2000 the initial double b acks were on average high. The in Finland found, the biggest initial profit was generated by F-Secure whose stock flush on its first trading day on November 5, 1999 from the initial offering price of 7.70 euros to 27.45 euros.The initial underpricing of Initial Public Offerings(IPOs) fits paltryly to the long-term return on IPO shares. Ritter (1991) shows that IPO firms on average give poorer three-year returns than other listed firms in comparable sizes and industries. He explains this weak return on IPO shares with timing. Firms time their IPOs to the periods when the market overprices the firm, its industry and IPOs in general. The weak share performance afterwards the IPO can also be explained with earnings management. If the firm before the IPO artificially boosts its value through managing earnings, the market will sooner or later find out the true performance of the company and devalue its shares.Compared to bad accounting or simple randomness, the distinguishing shoot a line of earnings management is the presence of intent. Studies localiseing earnings management usually make the assumption that intent is present in the circumstances where the tests are made. In research testing for earnings management in IPO firms it is faux that it is capital market motivations that drive the firms to earnings management. The aim is to maximize the companys fair-mindedness value and through this increase the owners wealth and reduce the companys financing costs.The more or less commonly used method to test for earnings management is the exam of accruals because they are easier to manipulate than cash flows. deviate accruals are considered as a sign of earnings management. The major problem in earnings management studies is how to determine if accruals are brachydactylously high or low. Most models used to estimate the normal level of accruals base their estimations on the firms past accruals or comparable firms accruals. In the literature the normal and vicarious accruals are usually called non discretionary and discretionary accruals.In particular, the research based on U.S. data provides whole evidence of discretionary accruals in IPO firms. Additionally, Teoh, Welch and Wong (1998) show that discretionary accruals can be linked to companies long term stock market performance and thus challenge the efficient market hypothesis, as the market fails to account for the manipulation. When they grouped firms by the magnitude of discretionary accruals before the IPO, they found that firms in the quartile with the lowest discretionary accruals (negative) outperformed the market by about 4% over three years, whereas firms in the quartile with the highest discretionary accruals underperformed the market by about 25%.To date there have been at least three studies on earnings management in Finnish IPOs which from Ora (2000), Eriksson (2001) and currently Spohr (2004). First study is to showing that earnings management has been present in Fi nnish IPOs, Ora (2000) investigates if there is any difference in earnings management behavior between 1980s and 1990s IPOs. Her results indicate that earnings management seems to have vanished in the later period. Applying a get along accruals measure Oras tests are affected by the substantial changes in discretionary reserves that Finnish companies could use for managing earnings. These obvious forms of earnings management vanished gradually in the 1990s imputable to the accounting legislation reform.Second study done by Eriksson (2001), whereby the tests for earnings management on a similar have to this study and uses a financial ratios model called the Beneish M-score. The higher the M-score the higher is the likelihood that earnings management has occurred. Erikssons M-score averages of the take in indicates that no earnings management were present in the financial year closest to the IPO.Finally finding obtain from Spohr (2004), the firms ownership structure and the pre-IP O owners share of ownership decrease in the IPO were used to formed expectations about the likelihood of finding earnings management before the IPO. Earnings management was hypothesized to be present in the entrepreneur owned but not in the institutionally held firms. Furthermore, the probability of earnings management was assumed to be related to how much the entrepreneurs ownership decreased in the IPO. The profitability of the total attempt of 56 Finnish IPO firms showed a relationally high level of profitability in the critical period for which earnings management was tested when compared to three periods before and after the critical period. The most world-shaking change in profitability occurred in the entrepreneur firms after the IPO. To coiffure the question of whether high profitability was only a result of roaring timing, earnings management tests were conducted on accruals. The results support the hypothesis that entrepreneurs manage earnings before the IPO. In line of credit to expectations, earnings management behavior seemed not be affected by how much of their ownership entrepreneurs gave up in the IPO. In the institutional owned IPO firms, no evidence of upwardly earnings management before the IPO was found. The limitation of the study is the sample is small.Earnings managements and IPOs under pricing -Evidence from JapanThis study had been done by unstated authors in the year 2010. The study is based on the sample of 910 firms that went public in Nipponese market between 1995 and 2005. The area of the study is would like to seek whether initial public offerings (IPO) are undervalued or overvalued using comparable firm multiples, (2)whether and how earnings management affects under or overvaluation, and (3) whether and how under /over-valuation and earnings management affects IPO under pricing. The underpricing phenomenon is such of common fray covered in previous literature on Initial public offering companies over the business world. It is well known when companies go to public, the price at which enthronisation banker sells the stock to investors in generally below the price at which the stocks trades in the secondary market shortly thereafter, resulting in a substantial price jump on the first day o trading. The meaning of IPOs underpricing is does not mean of undervalued (Purnanadam Swaminathan, 2004).The case in Japan the authors had examined whether Japanese IPOs are undervalued or overvalued using comparable firms multiples, similar method as done by Purnanadam and Swaminathan (2004). Then he investigates the relation between under or overvaluation and first-day return (underpricing). Later on, they identified the way of earnings management affects under or overvaluation and underpricing.Lastly the authors found that about 60 to 70% of Japanese IPO firms are undervalued relative to their industry peers, and most of undervalued firms have verifying first day return arranged with the asymmetric informat ion models of underpricing. On the other hand, overvalued firms consisting of 30-40 % of IPO firms also earn 7% to 12% higher first day return, and pre-IPO year abnormal accruals and the magnitude of underpricing are positively correlated when firms are overvalued. These findings suggest that IPOs are overvalued more in hot issue periods when investors tend to be approving about the future performance of the IPOs, while underwriters undervalue IPO firms in usual market condition.Earnings managements and performance towards IPO companies Issues in MalaysiaThis IPOs issue on earnings management was revealed by Rahman and Abdullah (2003). They are trying to identify the causes of firms issuing virtue produce poor returns to investors in the long get by exploring the potential opportunities for earning management during the period prior to the public lean and its correlation with initial listing and post issues performance. The study covered 187 IPO valid firms identified from Burs a Malaysia Investors digest since January 1989 upward to December 1998. There are various of industries selected including tradings and services, Consumer product, construction, Properties, Infrastructure and Project companies, plantation, industrial product and hotels.The method used in this study is similar with previous study made by Abdul Rahman(2000), Tay (1993) and Ritter (1991), whereby this study is measuring abnormal return using a buy-and-hold returns approach. The Abnormal return are calculated based on the difference between holding period returns of sample IPOs firms and control companies.Further the study focuses on current accrual as the source of earning management. The types of accrual is whether discretionary accrual or non discretionary accrual. This justification is based on the definition of discretionary accrual itself which is those manipulated earnings that are determined at the discretion of management (Dennis and Michel, 1996 and Teoh et al,1998). The examp le of discretionary accrual the changes in allowance for doubtful account because on managements interest. According to Teoh et al (1998) the discretionary current accrual are actually superior proxy for earnings management. While in contrast the nondiscretionary accrual is the change as a result of managements accounting decisions that are of interest to the firm (Rahman Abdullah, 2005). As stated example, during the economic growth, one would expect accruals such as account receivables and account payable to change as sales increase without earnings management occurring.The most interested in this issue on IPOs is whether the enthronisation activities in such companies will benefit investors who invest in the company. There are several studies whether done in overseas or Malaysia has been shown that IPO is a wealth reducing investment to investors in the long run. The evidence have been seeking in US whereby they found that IPO as poor long run investment for investors (Ritter, 1991 Loughran and Ritter, 1995 and Teoh et al, 1998). Also have been proven this similar issues happen in Malaysia of poor post issue performance (Ku Ismail et al, 1993 and Pok et al, 2000).The result of the study by Rahman and Abdullah (2005), found that IPO in the average have experience important positive abnormal return relative to the non-IPO firms during the initial period if the measuring taking to consider of offering price to the end of the day listing price. barely the IPO firms is obtain significant negative towards share return relative to their control firms during the first, second and third year following(a) their initial listing on Bursa Malaysia. To solve the research question to why firms issuing equity produce poor returns to investors in the long run, the authors found that Malaysia IPO firms manage their earnings upwards in the year prior to public listing on Bursa Malaysia. Furthermore, those IPO firms that manage earnings are not importantly different betwe en industries but are significantly different between the Main and Second board.Subsequently, the result on their study in relation between prior earnings management and post issues share return performance after the initial public listing is no significant relationship. The result sustain with respect to IPO firms with high or low level of earnings management.In addition according to the Rahman and Abdullah (2005) there is no evidence to suggest that the pre offerings earnings management is able to predict the abnormal returns during the initial period and over one to three years following equity offerings. This argument actually had supported from previous literature made by Ku Ismail et al. 1993 and Shivakumar, 2000), whereby they mentioned that the positive abnormal return during the initial period may be due to the underpricing by underwriters and also as a result of asymmetric information among investors during the announcement period.The result of positive share return at the initial period is actually contradicted with the literature from Teoh et al (1998). He argues that the investors are unable to fully understand managerial earnings at the time of equity offerings and ends up a high offer price. The possible reason of negative significant post issue return one to three years after listing may be due to the unfavorable earnings revealed by media, analysts report and financial statement after the offering(Rahman Abdullah 2005).CONCLUSIONIn a review of earnings management in IPOs literature, Spohr (2004) and Rahman and Abdullah (2005) are identify a range of potential significant incentives to abridge earnings management. It is including contracts written in terms of accounting numbers, capital market expectation and valuation and government actions.Managers of an IPO company probably motivated to manage earnings in the reporting period following the IPO in order to align more closely with the prediction for the period (Ismail Weetman, 2008). In ad dition, Ismail and Weetman also found that managers also motivated to manage earnings to increase their short term wealth at the expense of the long term value of the firm. According to Rahman and Abdullah (2005), IPO companies have an opportunity in manipulating offering-year discretionary current accrual and non discretionary current accrual.I sight here there are several opinions regarding the IPOs market return pop out with when company went to public upward to three years later. Therefore the investors in particular should concern with any information announced by the firm before attempting to invest. There are some evidence mentioned that the investing in IPO is kind of short term wealth. This could be happen because there is an existence of earnings management in their operation in order to meet the requirement by Securities commission.