Earnings Management to Avoid Delisting from a Stock Market

65 Pages Posted: 31 Jan 2015 Last revised: 30 Aug 2015

See all articles by Ales Cornanic

Ales Cornanic

Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Czech Republic

Jiri Novak

Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Czech Republic

Date Written: August 30, 2015

Abstract

We show that firms ‘in danger’ of being delisted from a stock market (NASDAQ) report higher performance-adjusted discretionary accruals and the inflated accruals are associated with an increased likelihood of maintained listing. Accruals of firms ‘in danger’ are less positive in fiscal quarters audited by a Big-4 auditor and after the implementation of SOX. In contrast, accruals are higher for firms that benefit most from public listing and for firms with good future prospects. This suggests that managers consider reputation and litigation risk associated with earnings management and they manage earnings only when they believe the firm will recover in near future. The market can thus interpret discretionary accruals as a signal revealing managers’ private information about firm quality. Consistent with the signaling explanation we observe a stronger stock price reaction on the announcement of earnings that contain large accruals in threatened firms.

Keywords: Delisting, earnings management, discretionary accruals, insider trading, reverse stock split, audit, Sarbanes-Oxley Act

JEL Classification: G34, M41, M42, M48

Suggested Citation

Cornanic, Ales and Novak, Jiri, Earnings Management to Avoid Delisting from a Stock Market (August 30, 2015). Available at SSRN: https://ssrn.com/abstract=2557623 or http://dx.doi.org/10.2139/ssrn.2557623

Ales Cornanic

Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Czech Republic ( email )

Opletalova 21
Prague 1, 110 00
Czech Republic

Jiri Novak (Contact Author)

Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Czech Republic ( email )

Opletalova 1606/26
Praha 1, 11000
Czech Republic
+420 222 112 314 (Phone)

HOME PAGE: http://ies.fsv.cuni.cz/cs/staff/novakji

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