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Earnings Management to Avoid Delisting from a Stock Market

Author

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  • Ales Cornanic

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic)

  • Jiri Novak

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic)

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.

Suggested Citation

  • Ales Cornanic & Jiri Novak, 2015. "Earnings Management to Avoid Delisting from a Stock Market," Working Papers IES 2015/22, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Aug 2015.
    • Handle: RePEc:fau:wpaper:wp2015_22
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    File URL: http://ies.fsv.cuni.cz/sci/publication/show/id/5347/lang/cs
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    Cited by:

    1. Kimouche Bilal, 2021. "The Effect of Stock Market Listing on Real Earnings Management: Evidence From Algerian Companies," Naše gospodarstvo/Our economy, Sciendo, vol. 67(4), pages 96-107, December.

    More about this item

    Keywords

    Delisting; earnings management; discretionary accruals; insider trading; reverse stock split; audit; Sarbanes-Oxley Act;
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