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Essays on earnings management in response to natural disasters

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  • Title:
    Essays on earnings management in response to natural disasters
  • Author: Jevasuwan, S
  • Subjects: Earnings management ; Earnings Quality ; Natural Disaster
  • Description: This study examines earnings management practices in the wake of natural disasters and investigates how earnings management affects credit ratings during such events. Initially, we provide an extensive literature on earnings management and earnings quality, an inverse measure of earnings management, as the foundation for our empirical development. Beginning with the first set of studies, the primary objective is to assess the level of earnings management used by firms around natural disasters. Our main analyses are performed across two different disasters, namely the 2004 tsunami in the Indian Ocean and the 2011 flooding in Thailand, in order to investigate whether the different intensity of the disaster matters for firms' earnings management strategies. We employ a differences-in-differences (diff-in-diff) approach to test how firms engage in earning management when facing the disaster. We further examine how the severity of the disaster affects managers' incentives to manage earnings by considering the difference in the country-level financial damage caused by the tsunami and the flooding. Our findings show that firms manage earnings to misrepresent economic performance after going through the disasters and that the levels of earnings management hinge upon the severity of the natural disaster. For the second set of empirical evidence, the primary objective is to analyze the implications of earnings management for credit ratings. That is, we examine whether (how) credit rating agencies see through (react to) earnings management used by firms in the event of a natural disaster. Similar to the first empirical study, we also investigate whether the effect of earnings management on credit ratings are conditional on the disaster intensity. Moreover, we explore those effects across the types of credit ratings, i.e. investment and speculative grades. Our evidence further suggests that credit rating agencies impose penalties for firms that manage earnings during disasters. The higher the intensity of the disaster, the more likely the credit rating agencies will adjust their credit ratings for earnings management. Lastly, credit rating agencies tend to adjust their credit rating in speculative-grade vs. investment-grade firms in different ways. Overall, this dissertation provides new and novel evidence that firms engage in earnings management when managers are incentivized, as in our case, by natural disasters. We contribute to the literature on earnings management by shedding light on natural disasters as both a determinant of earnings management and on its consequences for the relation between earnings management and credit ratings.
  • Publisher: University of Exeter
  • Creation Date: 2019
  • Language: English
  • Source: EThOS: Electronic Theses Online Service (Full Text)
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