The Behavior of Earnings Quality in Different Business Cycles Using Panel Smooth Transition Regression (PSTR) Model

Document Type : Research Paper

Authors

1 MSc. in Accounting, Urmia University, West Azerbaijan, Urmia, Iran

2 Associate Prof. Accounting Dept. Urmia University, Urmia, Iran

3 Economics Dept, Faculty of Economics and Management, Urmia, Iran

Abstract

This paper investigates the threshold effects of business cycles on earnings quality for the period of 2005 to 2015, using Panel Smooth Transition Regression (PSTR) model as one of the most prominent regime-switching models. For this end, accruals quality and earnings smoothing are used as measures of earnings quality, and sales growth as transition variable. The linearity test results indicate nonlinear relationship among variables under consideration. Moreover, considering one transition function and one threshold parameter, as a two regime model, is sufficient to specification the nonlinear relationship among variables. The results indicate that in the first regime, business cycles have a negative impact on both earnings smoothing and accruals quality, and beyond threshold value, in the second regime, the impact of business cycles is positive. Therefore business cycles have played an important role on the earnings quality.

Keywords

References

Jackson, A.B., & Rountree, R. (2014). Earnings co-movements and earnings manipulation in different economic states. Available in: https://www.uts. edu.au/sites/default/files/ACCconf14AJackson.pdf.
Anver, S. (2013). Income smoothing, Investor risk perceptions and stock price performance in Financial crisis. Working paper, University of North Carolina.
Banimahd, B., Hamidian, M., & Boustani, S. (2014). Operating cycle and earnings quality. International Conference in Accounting Management, Tehran University. (in Persian)
Borns, A. & Mitchell, W. (1946). Measuring Business Cycles. NewYork, NBER.
Callen, J. & Khan, L. & Lu, H. (2011). Accounting Quality, Stock Price Delay and Future Stock Returns. Contemporary Accounting Research, 20(20), 1-27.
Chang, C. (2007). The impact of earnings management on the predictive ability of accruals: Implications for earnings quality. Working paper, University of Houston.
Cohen, D. & Zarrowin, P. (2007). Earnings Management over Business Cycles. Working Paper, New York University.
Colletaz, G., Hurlin, C. (2006). Threshold Effects of the Public Capital Productivity: An International Panel Smooth Transition Approach. Working Paper, University of Orleans, PP. 1-39.
Ebrahimi, S.K., Bahraminasab, A., & Mamashli, R. (2017). The Effect of Financial Crisis on Earnings Quality. Journal of Accounting and Auditing Review, 23(4), 415-434. (in Persian)
Etemadi, H., Momeni, M., & Farajzadeh, H. (2012). How does the earnings management influence earnings quality? Journal of Financial Accounting Research, 2(12), 101-122. (in Persian)
Fok, D., Dijk, D., & Franses, P. (2004). A Multi-Level Panel STAR Model for US Manufacturing Sectors. Working Paper, University of Rotterdam.
Francis, J., LaFond, R., Olsson, P. M. & Schipper, K. (2004). Costs of Equity and Earnings Attributes. The Accounting Review, 79(4), 967-1010.
Francis, J., LaFond, R., Olsson, P., & Schipper, K. (2005). The Market
Pricing of Accruals Quality. Journal of Accounting and Economics, 39(8), 295–327.
Gaio, C. (2010). The relative importance of firm and country characteristics for earnings quality around the world. European accounting review, 19(4), 693-738.
Gonzalez, A., Terasvirta, T., & Van Dijk, D. (2005).Panel smooth transition regression models. SEE/EFI Working Paper Series in Economics and Finance, No. 604: 1-33.
Haghighat, H., & Panahi, M. (2010). Investigating the relationship between earnings quality and stock returns in listed companies in Tehran Stock Exchange. Journal of Accounting Knowledge, 2(5), 31-50. (in Persian)
Jaspreet, K. (2012). Business Cycles and Accounting Quality.Punjabi University Patiala Punjab, India.
Jude, E. (2010). Financial development and growth: panel smooth regression approach. Journal of Economic Development, 35(1), 15-33.
Karami, G., & Eftekhari, V. (2014). Review of Earnings Quality over the Business Cycle. Journal of Accounting and Auditing Review, 20(4), 93-112.
(in Persian)
Keshavarz, S., Lotfi, A., Agaha, R., & Nori, A. (2016). The relationship between earning smoothing and the growth rate of companies listed in Tehran Stock Exchange. Fourth International Conference on Applied Research in Management and Accounting. (in Persian)
Khodamipour, A., Karamshahi, B., & Taftian, A. (2012). Investigating the relationship between accounting conservatism and value relevance in Tehran Stock Exchange. Journal of Financial Accounting Research, 4(3), 71-86.
(in Persian)
Kordestani, G., & Tatli, R. (2014). Identification the Efficient and Opportunistic Earnings Management Approaches in the Earnings Quality Levels. Journal of Accounting and Auditing Review, 21(3), 293-312. (in Persian)
Leuz, C., Nanda, D., & Wysocki, P. (2003). Investor protection and earnings management. Journal of Financial Economics, 69(3), 505-527.
Li, Q., Wang, H., & Rong, X. (2013). Firm earnings persistent over the business cycle: Evidence from Listed Companies in China.China Accounting and Finance Review, 15(4), 166-203.
Madhumathi, R., & Ranganatham, M. (2011). Earnings quality, Corporate governance and Firm performance. Society of Interdisciplinary Business Research (SIBR), Conference on Interdisciplinary Business Research.
Mehrabanpour, M., Nadiri, M., & Jandaghi Ghomi, M. (2017). The Effect of Financial Status on Earnings Quality of Listed Firms in Tehran Stock Exchange. Journal of Accounting and Auditing Review, 24(1), 127-146.
(in Persian)
Mehrani, K. & Safarzadeh, M. (2011). Determining the relationship between corporate governance and earning quality based on native approach. Journal of Accounting, 2(7), 69-98. (in Persian)
Nikoomaram, H., & Mohammadzadeh, S. (2000). Providing a template to explain the relationship between corporate governance and earnings quality. Journal of Management Accounting, 3(4), 59-80. (in Persian)
Porvalialiyar, S., Jabbazadeh Kangarluiee, S., & Zaher, S. (2014). Investigating the relationship between accounting conservatism and earnings quality of listed companies in Tehran Stock Exchange. Quarterly Journal of Economics and Taxation, 2(1), 79-98. (in Persian)
Ronald, A. (2013). The impact of economic fluctuations on earnings forecasts. Global Journal of Business Research,, 5(2), 55-64.
Stroble, G. (2013). Earnings manipulation and the cost of capital. Journal of accounting research, 51(2), 449-473.
Tomy, R. E. (2012). Earnings Persistence over the Business Cycle. SSRN Working Paper, Stanford University.
Valipour, H., Talebnia, G., & Javanmard, S. (2012). The effect of earnings management on the earnings quality of financial corporations companies. Journal of Accounting Knowledge, 4(13), 75-103. (in Persian)
Wang, H., Li, Q., & Chen, Y. (2015). Earnings management, business cycle, and product market competition. China Journal of Accounting Studies, 3(2), 136-157.
Accounting and Auditing Review
Volume 25, Issue 1
2018
Pages 113-134

Files

Share

How to cite

Statistics