Do Firms Use Financial Engineering to Manage Their Reported Earnings?

Posted: 26 May 2005

See all articles by Mohamed Chakib Kolsi

Mohamed Chakib Kolsi

University of Sfax - High Institute of Business Studies Sfax Tunisia

Hamadi Matoussi

University of Manouba - Gestion

Date Written: March 2005

Abstract

Recent corporate financial scandals show that firms subject to deep legal investigations, like Enron, present extreme cases of accounting manipulations with financial engineering as securitization of receivables or debt extinguishment which are complex and characterised by a low level of disclosure. Although the use of such transactions is widespread within firms and is legitimate by accounting rules, managers can use these tools to manipulate accounting earnings in order to achieve various goals such as misleading investors and analysts, maximising firm value, and circumvent the traditional earnings management with discretionary accruals.

This paper empirically examines the determinants of the use of financial engineering techniques by a sample of multinational firms listed on the NYSE to manipulate their earnings. Our results show that leverage, credit sales, transactions with unconsolidated subsidiaries and the presence of the firm on emergent markets are significant determinants of the decision to the use of financial engineering for manipulation purposes. Our study contributes to the literature on earnings management, financial engineering and corporate reporting and can be useful to both managers in order to let them understand the impact of such financial transactions on accounting figures, to investors on their financial decisions and resources allocations and finally to regulators when disclosing accounting standards.

Keywords: Financial engineering, securitization, defeasance, earnings management, disclosure quality, firm value

JEL Classification: M41, M43, M47, M49, G38, K22

Suggested Citation

Kolsi, Mohamed Chakib and Matoussi, Hamadi, Do Firms Use Financial Engineering to Manage Their Reported Earnings? (March 2005). Available at SSRN: https://ssrn.com/abstract=729004

Mohamed Chakib Kolsi (Contact Author)

University of Sfax - High Institute of Business Studies Sfax Tunisia ( email )

Sfax
Tunisia

Hamadi Matoussi

University of Manouba - Gestion ( email )

Campus Universitaire de la Manouba
Manouba 2010, 2010
Tunisia
216-71-600 705 (Phone)
216-71-602 404 (Fax)

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