THE TIMING Of ASSET SALES And EARNINGS MANIPULATION Eli Bartov

1. THE TIMING Of ASSET SALES And EARNINGS MANIPULATIONEli Bartov Presented By: Herlina Helmy 0806435495

2. 1 2 3 4 5 INTRODUCTION PRIOR RESEARCH HYPOTHESES FORMULATION RESEARCH DESIGN RESULT & ANALYSIS Outline 6 6 CONCLUSION Contribution & Limitations

3. INTRODUCTION Motivation APB opinion No. 3 classified that income or losses from PPE not recognize as ordinary item, but as Part of income from operation Management use that houl in earnings manipulation, especially income smoothing and debt-equity hypothesis Because of that so many managers do some earning manipulation at that time (fortune, 1989; Schipper 1989)

4. Cont’d.. Examining of a form of real earning manipulation: timing of income recognition from disposal of assets Research Question Purpose of this study Does Manager manipulate reported earning trough choice timing of income recognition from disposal of asset.

5. PRIOR RESEARCH

6. HYPOTHESES FORMULATION • - The earnings-smoothing hypothesis suggest that earnings are • manipulated to reduce fluctuations around some level • considered normal for the firm • This study use EPS as a target, advocates the use of this • definitions by two reason: • 1. It is relatively simple • 2. It appears more realistic than other definitions H1: There is a negative correlation between income from asset sales and earnings changes (exclusive of asset sale effects

7. Cont’d…. Debt covenants require borrowing firms to maintain specified levels of accounting numbers and debt-equity ratio Larger a firm’s debt-equity ratio, the more likely its manager are to shift reported earning from future periods to a current period and to engage in Greater manipulation In timing asset sales, debt-equity hypotheses suggest: H2: There is a positive correlation between income from asset sales and debt-equity ratios

8. RESEARCH DESIGN • Compustat expanded annual • File with OTC firms • COMPUSTAT quarterly industrial • Daily stock returns is taken NYSE/ • ASE and NASDAQ • Period: 1987-1989 • Final sample: 653 firm-year • divided in 2 sample group: • 1. 397 gain firms • 2. 256 loses firms Data Description • Hypotheses testing in 3 ways: • Univariate Test • Multiple regression • Sensitivity analysis • The Research design for two task: • To test empirical implication of earnings • smoothing and debt equity hypotheses • 2. To assess the sensitivity of the results to • possible specification error

9. Main Model – Multiple Regression: ASSIN: income from asset sales in current year/stock price at beginning δ EPS=EBT-income fom asset sales per share DETEQ=Book value LTD current year/BE at beginning ε=residual Cont’d…. Main Sensitivity Analysis SALEP=sales of long-lived aasset (PPE)current year/MVE beginning year SALEIN=sales of investment current year/MVE beginning year Bonus1:upper bound Bonus plan – EBT current year/ MVE awal th. if EBT < lower bound set 0 BONUS2: dummy variable. 1 = lower bound > EBT, 0 = other TAX = dummy variable. 1 = Looses in asset sales dan EBTexclude sales looses asset bernilai postif 0 = other

10. RESULT • Firm size was selected due to importance in explaining cross-sectional differences with respect to such characteristic as firm performance and risk • Current ratio was selected as a measure for the short-time soundness of the firm • Although the sample clearly spans a wide range of firm size, sample firms are substantially smaller than other COMPUSTAT firms • Current ratio of the sample firms are larger than those of the other COMPUSTAT firms,& the sample firms thus appear financial healthy (Table1)

11. Cont’d….

12. Earnings smoothing hypothesis Implies that firms exhibit a Negative earnings change Before asset sale income should Report higher income from Asset sales than firms that Experience a positive change H2 Univariate Test H1 Univariate Test For Earning-Smoothing Hypotheses Median: 0.09%, Mean: 1.23% With level significant 5% Result Support H1

13. Cont’d….

14. Result • Hand et al shows result at fourth fiscal year the sale of long-lived assets.

15. H2 Univariate Test Univariate Test for Debt-Equity Hyphothesis Debt-Equity Hypothesis Implies that income from asset Sales by higher-leverage firms Exceeds that for lower-leverage firms Median: 0.09%, Mean: 1.23% With level significant 5% H2 Result Support H2

17. Multiple Regression Tests • Full Sample α1 negative significant, α2 positive significant • Tests show that the earnings-smoothing and the debt-equity • effects are jointly zero can be rejected with high level • convidence • The earnings-smoothing effect is documented in both subsamples, • Which suggest that both positive and negative earnings change may • be subject to smoothing • The slope etimates for the subsample of firms with negative EPS exceed the sub sample • Of firms with positive EPS

18. Multiple Regression Tests

19. Sensitivity Analysis • SALEP & SALEIN positive, and significant • Bonus plan1 negative, not significant • Tax, negative significant, implies that tax play important role in timing asset sales