Manejo de pastos naturales

Jones (1991) develops the model on basis of establishing a context for earnings management during investigations by International Trade Commission of import relief where the decisions are known to be based on accounting numbers (and industry profitability) and the incentive is for managers to decrease earnings in order to obtain/increase import relief.

Import reliefs are measures used by Governments to reduce the costs to domestic producers of cheap imports and include measures such as tariffs, quotas, marketing agreements and subsidies. The contracting parties in this situation are assumed to be the government/regulators, the producers receiving import relief and a diverse group of consumers losing an amount of wealth equal to the import reliefs.

Investigations are carried out on an industry basis and relief is granted where imports are

deemed to have caused “serious injury” to an industry based on assessment of

“reasonable levels of profitability”, decline in sales, growing inventory and downward

trends in production, profits, wages or employment. Two categories of investigation are

identified: general escape clause investigations; and antidumping/countervailing duty

investigations. The second category occurs where there is evidence of unfair trading

practice due to imports sold at less than fair value (antidumping) or benefiting from

foreign subsidies (countervailing duty). In the first category (general escape clause

investigations) it is not necessary to prove unfair trading practices but there must be

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temporarily released from its obligations under the General Agreement on Tariffs and

Trade (GATT), hence the term “escape clause”.

Jones (1991) identifies the differences between the Total Accruals Model and the Single Accruals Model as follows

• The Total Accruals Model is preferable to the single accruals model because it is more powerful in terms of capturing earnings management.

• The Total Accruals Model measures the change in non-cash working capital before income tax payable minus depreciation expenses, and the Single Accrual Model measures cash working capital.

Jones stated that earnings management could achieved by several means, shown in the figure below:

Jones (1991) Earnings Management

Earnings Management Assumption

The Jones (1991) model is based on the DeAngelo model, which assumes that the “average change in non-discretionary accruals (NA) is approximately zero so that the change in total accrual (TA) reflects change in discretionary accruals (DA)” (page 207)

Earnings management Debt-equity swaps Debt defeasance (hedging) Change in accounting methods Capital structure changes

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However, this assumption is less reasonable in the scenario studied by Jones. Total accruals are dependent on the economic circumstances of the firm (Kaplan, 1985) and decreases in revenues (which we have by definition in this sample) are likely to cause decreases in NA.

A new model is developed to take into account changes in the economic circumstances of the firm (falling revenues and asset values). This is an OLS regression model

𝑻𝑻𝑨𝑨𝒎𝒎,𝒕𝒕 𝑨𝑨𝒎𝒎,𝒕𝒕−1= 𝜶𝜶𝒎𝒎� 1 𝑨𝑨𝒎𝒎,𝒕𝒕−1�+𝜷𝜷1,𝒎𝒎� ∆𝑹𝑹𝑬𝑬𝑰𝑰𝒎𝒎,𝒕𝒕 𝑨𝑨𝒎𝒎,𝒕𝒕−1 �+𝜷𝜷2,𝒎𝒎� 𝑫𝑫𝑫𝑫𝑬𝑬𝒎𝒎,𝒕𝒕 𝑨𝑨𝒎𝒎,𝒕𝒕−1�+𝝐𝝐𝒎𝒎,𝒕𝒕

Total accruals (TA) is given by

𝑻𝑻𝑨𝑨𝒕𝒕 = [∆𝑪𝑪𝑪𝑪𝑮𝑮𝑮𝑮𝑫𝑫𝒎𝒎𝒕𝒕𝒎𝒎𝑮𝑮𝑮𝑮𝑫𝑫𝒕𝒕𝑮𝑮 − ∆𝑪𝑪𝒎𝒎𝑮𝑮𝑪𝑪 − ∆𝑪𝑪𝑪𝑪𝑮𝑮𝑮𝑮𝑫𝑫𝒎𝒎𝒕𝒕𝒍𝒍𝒎𝒎𝒎𝒎𝒃𝒃𝒎𝒎𝒍𝒍𝒎𝒎𝒕𝒕𝒎𝒎𝑫𝑫𝑮𝑮]

− 𝑬𝑬𝑫𝑫𝒑𝒑𝑮𝑮𝑫𝑫𝒅𝒅𝒎𝒎𝒎𝒎𝒕𝒕𝒎𝒎𝑮𝑮𝒎𝒎𝒎𝒎𝒎𝒎𝑬𝑬𝒎𝒎𝒎𝒎𝑮𝑮𝑮𝑮𝒕𝒕𝒎𝒎𝑮𝑮𝒎𝒎𝒕𝒕𝒎𝒎𝑮𝑮𝒎𝒎𝑫𝑫𝒎𝒎𝒑𝒑𝑫𝑫𝒎𝒎𝑮𝑮𝑫𝑫

All variables are scaled by total assets (A) in year t-1 to reduce heteroskedasticity, and T is the estimation period used to establish the level of “normal accruals” for each firm, which ranges between 14 and 32 years.

The models of normal total accruals are estimated as time series but the significance of income-decreasing accruals is tested using cross-sectional tests in years 0 and 1 of the ITC investigation.

There are two issues related to the assumption that average change in non-discretionary accruals (NA) is approximately zero so that the change in total accrual (TA) reflects change in discretionary accruals (DA), and these are:

• REV (firm’s revenues) which is used to control for the economic environment is not a completely exogenous variable to earnings management levels.

• The relationship between NA and the independent variables is assumed to be stationary.

The residual term from this model represents discretionary accruals (DA). The overall significance of discretionary accruals is tested using a standardised prediction error.

68 Measuring Earnings Management

Jones’s (1991) model differs from prior studies such as Healy (1985), DeAngelo (1986) and McNichols and Wilson (1988), because Jones (1991) uses total accruals as a proxy for earnings management. Healy (1985) and DeAngelo (1986) measured earnings management by dividing total accruals into discretionary and non-discretionary components. McNichols et al. (1988) measured earnings management by using models of single accruals. Jones (1991) suggested that using total accruals under accruals is more appropriate for measuring earnings management in her sample than single accruals, because international trade commissioners select their cases based on earnings before tax, which will reflect total accruals. Therefore, Jones (1991) suggested that the total accrual should capture managers’ manipulation better than previous studies such as: Healy (1985), DeAngelo (1986), and McNichols et al (1988).

Jones’ version of total accruals was calculated as below:

𝑻𝑻𝑨𝑨=𝑪𝑪𝑰𝑰𝑪𝑪𝑪𝑪𝑩𝑩𝑻𝑻 − 𝑫𝑫𝑬𝑬 ………..…….………. (1)

Where; TA is total accruals; CNWCBT is the change in non-cash working capital before income taxes payable less total depreciation expenses, and DE is total depreciation expenses.

CNWCBT was measured as below

𝐖𝐖𝐖𝐖𝐖𝐖𝐂𝐂𝐏𝐏 = (𝐖𝐖𝐃𝐃 − 𝐖𝐖𝐃𝐃𝐍𝐍𝐍𝐍)−(𝑪𝑪𝑳𝑳 − 𝑪𝑪𝑴𝑴𝑨𝑨𝑰𝑰𝑻𝑻𝑫𝑫) ……….…… (2)

Where; CA is current assets; CASI is cash and short-term investments; CL is current liabilities, and CMAITP is current maturities of long-term liabilities and income taxes payable.

Jones used the DeAngelo (1986) model (specific expectation model) to model total accruals:

∆_{𝐏𝐏𝐃𝐃𝐭𝐭 = (𝐏𝐏𝐃𝐃𝐭𝐭− 𝐏𝐏𝐃𝐃𝐭𝐭−𝐤𝐤)} = _{(𝐃𝐃𝐃𝐃𝐭𝐭− 𝐃𝐃𝐃𝐃𝐭𝐭−𝐤𝐤)}− (𝐍𝐍𝐃𝐃𝐭𝐭− 𝐍𝐍𝐃𝐃𝐭𝐭−𝐤𝐤) ……… (3)

Where; (TA_t−TA_t−k) is the change in total accruals; (DA_t−DA_t−k) is the change in discretionary accruals; and (NA_t−NA_t−k) is the change in non-discretionary accruals

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Jones (1991) explained that differences in revenue would bring variations in numerous elements in the financial statements.

Based on the results, Jones found the changes in accruals and earnings in year (+1) are positive and not significant. In addition she reported that the changes in cash flow and revenue are negative and not significant, which results from firm managers decreasing income to avoid any ex post settling up by the regulators or to avoid taxes.

Accruals Model

Based on the results in the above section Jones (1991) established a new model; which assumes that the relationship between non-discretionary accruals and the explanatory variables is stationary. 𝐏𝐏𝐃𝐃𝐢𝐢𝐭𝐭 𝐃𝐃𝐢𝐢𝐭𝐭−1 = 𝐛𝐛𝐢𝐢 ( 1 𝐃𝐃𝐢𝐢𝐭𝐭−1) +𝐂𝐂1𝐢𝐢 ( ∆𝐏𝐏𝐍𝐍𝐑𝐑𝐢𝐢𝐭𝐭 𝐃𝐃𝐢𝐢𝐭𝐭−1 ) + 𝐂𝐂2𝐢𝐢 ( 𝐏𝐏𝐏𝐏𝐍𝐍𝐢𝐢𝐭𝐭 𝐃𝐃𝐢𝐢𝐭𝐭−1) + 𝛆𝛆𝐢𝐢𝐭𝐭 ……….…...…….. (4)

Where; TA it is the total accruals for company (i) during period (t); ∆REV it is the change in the revenue for company (i) during period (t); PPE is property, Plant and Equipment; Ai t-1 is the total assets for company (i) for end of period (t-1); and εit is the

random error.

Total accruals included change in working capital accounts such as accounts receivable, accounts payable and inventories, which could affect revenues. However, the results showed that the change in revenues is not a significant factor.

Tests of Model Misspecification

Jones (1991) also investigates the relationship between abnormal accruals and change in revenue by using a sample of 459 firms that are not included in the ITC investigation sample. The findings show no systematic relationship between these two variables. This result lends support to the main hypothesis of the paper, which states that “managers of domestic producers that would benefit from import protection make accounting choices that reduce reported earnings during ITC investigation periods as compared to non- investigation periods” (page 200).

The results were refined further by additional tests completed in order to test the subsidiary hypothesis that “managers may have greater incentives to manage earnings if

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the ITC investigation is being conducted under the general escape clause1” (page 202). Her results in this section showed that petitioners are engaged in downward earnings management. Furthermore, she showed that the firms in the general escape clause sample were engaged in more downward earnings management than the firms in the antidumping sample2. These results support her earnings management hypothesis.

Portfolio Tests

By using OLS regression, the Jones (1991) model implicitly assumes no correlation between prediction errors and discretionary accruals (DAs). In order to determine the effect of relaxing this assumption, the firms were grouped by industry and DAs averaged across each group. This approach also addressed the “free rider” problem that arises since all firms in the industry benefit from any relief granted. The results of these tests show that “after the problems relating to cross-sectional correlation are mitigated by grouping firms in industry portfolios (which also results in grouping by year) the DAs in year 0 are still significantly income-decreasing” (page 223).

Concluding Remarks of Jones’s (1991) Paper

The Jones (1991) study found explicit evidence showing that managers decrease their earnings in the period of import relief investigation, particularly in year zero and the motivation for this was assumed to be the desire to maximize the relief granted to their firm. The empirical tests also show improvement in the power of the Jones model to detect earnings management compared to the models in Healy (1985), DeAngelo (1986) and McNichols et al. (1988).

3.6.5 The Modified Jones Model (Proposed by Dechow, Sloan and Sweeney, 1995)