Low quality of reporting in Asia compared to developed markets - the main incentives for investment in the financial sector in the region. Cash accounting - the methodology of recording transactions only if the real cash flows in or out of the firm.
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Second, we will analyze whether the following factors have an effect on abnormal accruals: o state ownership (as a proxy - government share in a company); o choice of stock exchange (local versus international, measures investors sophistication and disclosure requirements); o choice of auditor (lower versus higher quality), controlling for: o size and age of a company (as a proxy on information asymmetry); o market timing (average market-to-book ratio as a proxy of investors valuation of a company); o country, timing and industry effects (corresponding dummy variables). She tested whether firms that benefit from the import relief (from tariff increases or quota reductions) are interested in decreasing their earnings with the help of earnings management. (1995) and received a name of modified Jones model. The authors argued that Jones model does not capture manipulations with the sales itself, so they added an adjustment to the classic Jones model by subtracting trade receivables at the second stage. This was supposed to improve the precision of the proxy for earnings management. However, both approaches received some criticism and were reviewed in later articles (Teoh et al. (1998) examined relationship between IPO-year, long-run post-issue accruals and earnings performance. They argue that financial analysts interpret accounting information on behalf of investors and present forecasts of IPO firms’ earnings what influences IPO stock price. If analysts regularly misinterpret companies’ financials and believe that their high earnings represent good news while a portion of this great performance is due to window dressing, this may result in the overvalued IPO firms and further stock underperformance. The authors also find that misinterpretation of earnings occurs both in case of equity-issuing and non-issuing firms what helps to explain the general investors’ misevaluation of companies and further downward revaluation of stock. Xie (2001) investigated how the market prices abnormal accruals in more general setting than just in case of IPO and found that market not only priced but also overpriced abnormal accruals.
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