Underinvestment and Value Relevance of Earnings Management

Mohamat Sabri Hassan, Norman Mohd-Saleh, Aulia Fuad Rahman, Zaleha Abdul Shukor

Abstract


ABSTRACT

The aim of this study is to examine whether earnings management among underinvestment firms is positively related to share price. Firms are said to have high growth opportunity but is unable to fund investment projects due to liquidity constraints because of the information asymmetry between the firm and the investors. As a result, firms have to provide high quality accounting information (i.e. value relevant information) to reduce information asymmetry and hence be free from liquidity constraints. One type of accounting information that can be provided is discretionary accrual (proxy for earnings management). The sample of this study is firms listed on the Main Board of Bursa Malaysia from year 2001 to 2007. We use Ohlson’s model to examine the value relevance of earnings management. We separate earnings into managed and unmanaged earnings. Panel data regression analyses were performed to examine the role of underinvestment on the relationship between earnings management and share price. We also examine the value relevance of earnings management using the return model. The results from the panel data regression analysis indicate that earnings management increases the value relevance of accounting information. Further, underinvestment moderates the relationship between earnings management and share price. Nevertheless, the results suggest that earnings management among firms can decrease the value relevance of accounting information. In general, it is concluded that underinvestment weakens the relationship between earnings management and share price/return, hence it motivates managers to convey opportunistic earnings management.

Keywords: Informational earnings management; value relevance; information asymmetry; underinvestment

ABSTRAK

Tujuan kajian ini adalah untuk menguji sama ada pengurusan perolehan terutamanya bagi firma terkurang pelaburan mempunyai hubungan yang positif dengan nilai saham. Firma yang terkurang pelaburan dikatakan mempunyai peluang pertumbuhan yang tinggi namun tidak dapat membiayai projek pelaburan disebabkan kekangan kecairan yang disebabkan oleh jurang maklumat antara firma dan para pelabur. Ini menyebabkan firma yang terkurang pelaburan perlu menyediakan maklumat perakaunan yang berkualiti tinggi (i.e. maklumat yang mempunyai kerelevanan nilai) bagi mengurangkan jurang maklumat dan seterusnya bebas dari kekangan kecairan. Satu cara yang boleh dilakukan oleh firma adalah menerusi pengurusan perolehan yang bermaklumat. Ini berbeza dengan kajian lepas yang menunjukkan pengurus biasanya melakukan pengurusan maklumat secara oportunis. Sampel bagi kajian ini terdiri daripada firma yang tersenarai di Papan Utama Bursa Malaysia dari tahun 2001 hingga 2007. Kami menggunakan Model Ohlson bagi menentukan kerelevanan nilai pengurusan perolehan. Kami telah mengasingkan perolehan kepada perolehan tidak boleh diurus dan perolehan boleh urus (pengurusan perolehan). Analisis regresi data panel telah digunakan untuk menguji peranan terkurang pelaburan ke atas hubungan antara pengurusan perolehan dan harga saham. Kami juga menggunakan model pulangan untuk menguji kerelevanan nilai pengurusan perolehan. Dapatan dari analisis regresi data panel menunjukkan pengurusan perolehan meningkatkan kerelevanan nilai maklumat perakaunan. Selanjutnya terkurang pelaburan memoderatkan hubungan antara pengurusan perolehan dan harga saham. Walau bagaimanapun dapatan juga mencadangkan pengurusan perolehan di kalangan firma terkurang pelaburan mengurangkan kerelevanan angka perakaunan. Secara umumnya, dapat disimpulkan bahawa terkurang pelaburan melemahkan hubungan antara pengurusan perolehan dan harga saham dan pulangan, seterusnya memotivasi pengurus untuk menyampaikan pengurusan perolehan secara oportunistik.

Kata kunci: Pengurusan perolehan bermaklumat; kerelevanan nilai; jurang maklumat; terkurang pelaburan


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