Theses and Dissertations
Issuing Body
Mississippi State University
Advisor
Kohers, Theodor
Committee Member
Tahai, Alireza
Committee Member
White, Larry
Committee Member
Campbell, Randall
Committee Member
Kelly, Wayne
Date of Degree
12-10-2005
Document Type
Dissertation - Open Access
Major
Business Administration
Degree Name
Doctor of Philosophy
College
College of Business and Industry
Department
Department of Finance and Economics
Abstract
This study investigates the earnings management practices of firms around product recalls. In recent years, the management of earnings around firm-specific events has received considerable attention in the finance and accounting literature. New equity issues, mergers and acquisitions, share repurchases, and management buyouts are some events around which at least some firms have been shown to manage their earnings to achieve managements? objectives. Product recalls offer yet another interesting occasion when managers have incentives to cover up the true financial performance of their firms and mislead investors. In order to determine whether firms announcing product recalls manage earnings more aggressively than non-announcing firms, this study employs the cross-sectional version of the modified Jones (1991) model, as adapted by Teoh, Welch, and Wong (1998 a and b). In order to address the misspecification concern of the model, especially in the context of a performance-related event like product recall, we suggest a modification in the model. We show that the proposed change in the model not only better controls for event-specific working capital changes around recalls, it also increases the explanatory power of the model. Overall, our results suggest that managers tend to manage earnings upwards in quarters immediately preceding and following the recall announcement quarter. We also find weak evidence of downward earnings management in the quarter of recall. These results are in line with the predictions of theoretical models and the findings of past empirical studies in earnings management. The results of our research have important implications for investors and regulators.
URI
https://hdl.handle.net/11668/17386
Recommended Citation
Ahmed, Zeeshan, "An Investigation Of Firms' Earnings Management Practices Around Product Recalls" (2005). Theses and Dissertations. 578.
https://scholarsjunction.msstate.edu/td/578