The effects of earnings management on information asymmetry and stock price synchronicity

Figures & data

Table 1. Statistic description

	EM	ASYM	R-square	SYN	AUDIT	FOWN	MOWN	LEV	SIZE	AGE
Max	1.908	6.492	0.960	1.391	1.000	77.525	74.738	1.429	45.882	94.000
Min	−2.255	0.000	0.000	−3.000	0.000	0.000	0.000	0.001	13.015	9.000
Mean	0.134	1.015	0.078	−1.726	0.364	13.820	17.105	0.452	20.968	25.610
SD	0.427	0.862	0.085	0.743	0.327	13.346	12.459	0.261	5.707	145.828
Median	0.019	0.737	0.063	−0.952	0.000	12.051	14.607	0.376	11.024	18.337
Obs.	3,683	3,683	3,683	3,683	3,683	3,683	3,683	3,683	3,683	3,683

Note: The coefficient of determination (R-square) is calculated from the regression Equation 4(4) $ASY{M}_t=ln\left(1+\frac{SD\left(ForecastedEP{S}_t^q\right)}{\left|MedianofForecastedEP{S}_t^q\right|}\right)$(4) SYN is the stock price synchronicity, measured by Roll’s (1988) modified model (see Equation 6(6) $r_{it}={\beta }_{i0}+{\beta }_{im}{r}_{mt}+{\epsilon }_{it}$(6) and Equation 7(7) $SYN=Log\frac{R^2}{1-R^2}$(7) ); ASYM is the information asymmetry, estimated by Equation 4(4) $ASY{M}_t=ln\left(1+\frac{SD\left(ForecastedEP{S}_t^q\right)}{\left|MedianofForecastedEP{S}_t^q\right|}\right)$(4) and Equation 5.(5) $ForecastedEP{S}_t^q=EP{S}_t^{q-1}\left(1+\left(RO{E}_t^{q-1}RR{E}_{t-1}\right)\right)$(5) AUDIT represents a firm’s audit quality, which receives a value of 1 if the firm is audited by a Big4 and a value of 0 if the firm is audited by other audit companies. FOWN is foreign ownership, measured as the rate of shares held by foreign investors. SIZE is calculated as the natural logarithm of the firm total assets’ market value. MOWN is the proportion of shares held by the company directors, their spouses, and children. AGE is the number of the year from the time of the first operation. LEV is the total debt-to-equity ratio. In Table A2 of the Appendix, we divide our data sample into two groups based on the whole sample’s FOWN median, and thus, these two groups have equal numbers of observations. According to Table 3, the R-square of group 1 (with FOWN > 12.051) has a higher mean than that of group 2 (with FOWN <12.051). This result may signal the relevance of our assumption that a higher level of stock return synchronicity means a higher level of information efficiency.

Table 2. Correlation matrix

	EM	AUDIT	AUDIT*EM	FOWN	FOWN*EM	MOWN	LEV	SIZE	AGE	VIF
EM	1
AUDIT	−.422***	1								2.284
EM*AUDIT	−.150*	−.338*	1							1.906
FOWN	−.129***	.274*	.313*	1						1.811
EM*FOWN	−.016**	.029*	−.016*	.208**	1					1.245
MOWN	.307*	−.105	−.187	−.351**	.194	1				2.074
LEV	−.064	−.214*	−.008	−.172**	−.008	.241***	1			1.173
SIZE	−.124*	.071**	.325*	.229***	.163*	.168	.205**	1		1.839
AGE	−.003	.095	.044	.066*	.017	−.013	−.171**	.199***	1	1.102

Note: EM stands for earnings management and is calculated through the model by Dechow et al. (1995) (see Equation 1(1) $\frac{TA{C}_t}{TA{A}_{t-1}}={\alpha }_0+{\alpha }_1\frac{1}{TA{A}_{t-1}}+{\alpha }_2\left(\frac{\mathrm{\Delta }Sal{e}_t-\mathrm{\Delta }AC{C}_t}{TA{A}_{t-1}}\right)+{\alpha }_3\frac{F{A}_t}{TA{A}_{t-1}}+{\epsilon }_t$(1) , Equation 2(2) $\mathrm{N}\mathrm{D}{\mathrm{A}}_{\mathrm{t}}=\alpha +\hspace{0.17em}{\alpha }_1\hspace{0.17em}\frac{1}{\mathrm{T}\mathrm{A}{\mathrm{A}}_{\mathrm{t}-1}}+\hspace{0.17em}{\alpha }_2\hspace{0.17em}\left(\frac{\mathrm{\Delta }\mathrm{S}\mathrm{a}\mathrm{l}{\mathrm{e}}_{\mathrm{t}}-\hspace{0.17em}\mathrm{\Delta }\mathrm{A}\mathrm{C}{\mathrm{C}}_{\mathrm{t}}\hspace{0.17em}}{\mathrm{T}\mathrm{A}{\mathrm{A}}_{\mathrm{t}-1}}\right)+\hspace{0.17em}{\alpha }_3\hspace{0.17em}\frac{\mathrm{F}{\mathrm{A}}_{\mathrm{t}}}{\mathrm{T}\mathrm{A}{\mathrm{A}}_{\mathrm{t}-1}}$(2) , and (3)). AUDIT represents a firm’s audit quality, which receives a value of 1 if the firm is audited by a Big4 and a value of 0 if the firm is audited by other audit companies. FOWN is foreign ownership, measured as the rate of shares held by foreign investors. SIZE is calculated as the natural logarithm of the firm total assets’ market value. MOWN is the proportion of shares held by the company directors, their spouses, and children. AGE is the number of the year from the time of the first operation. LEV is the total debt-to-equity ratio.

Table 3. Results for the F and Hausman test

	ASYM Model		SYN Model
F test	F-test = 89.23	Prob. > P = 0.000	F-test = 106.47	Prob. > P =0.000
Hausman Test	Chi-square = 201.58	Prob. = 0.000	Chi-square = 135.94	Prob. = 0.000

Table 4. Regression results for the Fixed effects and Robust Fixed effects

	ASYM Model		SYN Model
	FM	FM (Robust)	FM	FM (Robust)
_Constant	1.2940	1.2940	0.3221	0.3221
EM	0.8825	0.8825	−0.3573*	−0.3573*
	(0.5160)	(0.7434)	(0.2608)	(0.3301)
AUDIT	−1.3018*	−1.3018*	3.0544	3.0544
	(1.4226)	(0.9527)	(0.8216)	(0.5390)
EM*AUDIT	3.7258	3.7258	−7.9025	−7.9025
	(0.9141)	(2.2753)	(2.6403)	(4.6056)
FOWN	−0.3947*	−0.3947*	1.0058**	1.0058**
	(0.5686)	(0.4802)	(1.1042)	(0.0553)
EM*FOWN	6.0137*	6.0137*	−8.0316*	−8.0316*
	(0.9529)	(2.1065)	(2.5393)	(3.0274)
MOWN	0.8335*	0.8335*	2.0147	2.0147
	(0.4176)	(0.6341)	(0.8065)	(1.0038)
LEV	−0.6130	−0.6130	−1.7027	−1.7027
	(0.3182)	(0.5084)	(0.8359)	(1.6311)
SIZE	−0.0305**	−0.0305**	0.1341**	0.1341**
	−0.0248	−0.0091	−0.0207	−0.0584
AGE	−0.0062*	−0.0062*	0.3693*	0.3693*
	−0.0059	−0.0044	−0.0785	−0.0524
Year Dummies	Yes	Yes	Yes	Yes
Industry Dummies	Yes	Yes	Yes	Yes
R_square	0.1635	0.1635	0.1963	0.1963
Heteroskedasticity	1.03***		1.26***
Autocorrelation	1.72E+05		3.09E+05
Observations	3,683		3,683

Note: *, **, and *** indicate p <0.1, 0.05, and 0.01, respectively. SYN is the stock price synchronicity, measured by Roll’s (1988) modified model (see Equation 6(6) $r_{it}={\beta }_{i0}+{\beta }_{im}{r}_{mt}+{\epsilon }_{it}$(6) and Equation 7(7) $SYN=Log\frac{R^2}{1-R^2}$(7) ); ASYM is the information asymmetry, estimated by Equation 4(4) $ASY{M}_t=ln\left(1+\frac{SD\left(ForecastedEP{S}_t^q\right)}{\left|MedianofForecastedEP{S}_t^q\right|}\right)$(4) and Equation 5(5) $ForecastedEP{S}_t^q=EP{S}_t^{q-1}\left(1+\left(RO{E}_t^{q-1}RR{E}_{t-1}\right)\right)$(5) . EM stands for earnings management and is calculated through the model by Dechow et al. (1995) (see Equation 1(1) $\frac{TA{C}_t}{TA{A}_{t-1}}={\alpha }_0+{\alpha }_1\frac{1}{TA{A}_{t-1}}+{\alpha }_2\left(\frac{\mathrm{\Delta }Sal{e}_t-\mathrm{\Delta }AC{C}_t}{TA{A}_{t-1}}\right)+{\alpha }_3\frac{F{A}_t}{TA{A}_{t-1}}+{\epsilon }_t$(1) , Equation 2(2) $\mathrm{N}\mathrm{D}{\mathrm{A}}_{\mathrm{t}}=\alpha +\hspace{0.17em}{\alpha }_1\hspace{0.17em}\frac{1}{\mathrm{T}\mathrm{A}{\mathrm{A}}_{\mathrm{t}-1}}+\hspace{0.17em}{\alpha }_2\hspace{0.17em}\left(\frac{\mathrm{\Delta }\mathrm{S}\mathrm{a}\mathrm{l}{\mathrm{e}}_{\mathrm{t}}-\hspace{0.17em}\mathrm{\Delta }\mathrm{A}\mathrm{C}{\mathrm{C}}_{\mathrm{t}}\hspace{0.17em}}{\mathrm{T}\mathrm{A}{\mathrm{A}}_{\mathrm{t}-1}}\right)+\hspace{0.17em}{\alpha }_3\hspace{0.17em}\frac{\mathrm{F}{\mathrm{A}}_{\mathrm{t}}}{\mathrm{T}\mathrm{A}{\mathrm{A}}_{\mathrm{t}-1}}$(2) , and (3)). AUDIT represents a firm’s audit quality, which receives a value of 1 if the firm is audited by a Big4 and a value of 0 if the firm is audited by other audit companies. FOWN is foreign ownership, measured as the rate of shares held by foreign investors. SIZE is calculated as the natural logarithm of the firm total assets’ market value. MOWN is the proportion of shares held by the company directors, their spouses, and children. AGE is the number of the year from the time of the first operation. LEV is the total debt-to-equity ratio.

Table 5. AR and Sargan tests

	SYN Model	ASYM Model
Arellano-Bond test for AR(1)	0.000	0.000
Arellano-Bond test for AR(2)	0.600	0.805
Sargan test	0.326	0.470
Hansen test	0.158	0.122

Table 6. System GMM estimates

	ASYM Model	SYN Model
LagASYM_L1	0.5602***
	(0.1118)
LagSYN_L1		0.7039**
		(0.0425)
EM	0.8825**	−0.3573*
	(0.7434)	(0.2608)
AUDIT	−1.3018*	1.0544**
	(0.9527)	(0.8216)
EM*AUDIT	3.7258**	−7.9025**
	(2.2753)	(2.6403)
FOWN	−1.9347*	1.0058*
	(1.4802)	(1.1042)
EM*FOWN	6.0137	8.0316
	(2.1065)	(2.5393)
MOWN	0.8335*	−2.0147**
	(0.6341)	(0.8065)
LEV	0.6130	1.7027
	(0.5084)	(0.8359)
SIZE	0.0305***	0.1441**
	(0.0091)	(0.0207)
AGE	0.0062**	0.6163**
	(0.0044)	(0.7085)
No. of Instruments	113	113

Note: *, **, and *** indicate p <0.1, 0.05, and 0.01, respectively. SYN is the stock price synchronicity, measured by Roll’s (1988) modified model (see Equation 6(6) $r_{it}={\beta }_{i0}+{\beta }_{im}{r}_{mt}+{\epsilon }_{it}$(6) and Equation 7(7) $SYN=Log\frac{R^2}{1-R^2}$(7) ); ASYM is the information asymmetry, estimated by Equation 4(4) $ASY{M}_t=ln\left(1+\frac{SD\left(ForecastedEP{S}_t^q\right)}{\left|MedianofForecastedEP{S}_t^q\right|}\right)$(4) and Equation 5(5) $ForecastedEP{S}_t^q=EP{S}_t^{q-1}\left(1+\left(RO{E}_t^{q-1}RR{E}_{t-1}\right)\right)$(5) . EM stands for earnings management and is calculated through the model by Dechow et al. (1995) (see Equation 1(1) $\frac{TA{C}_t}{TA{A}_{t-1}}={\alpha }_0+{\alpha }_1\frac{1}{TA{A}_{t-1}}+{\alpha }_2\left(\frac{\mathrm{\Delta }Sal{e}_t-\mathrm{\Delta }AC{C}_t}{TA{A}_{t-1}}\right)+{\alpha }_3\frac{F{A}_t}{TA{A}_{t-1}}+{\epsilon }_t$(1) , Equation 2(2) $\mathrm{N}\mathrm{D}{\mathrm{A}}_{\mathrm{t}}=\alpha +\hspace{0.17em}{\alpha }_1\hspace{0.17em}\frac{1}{\mathrm{T}\mathrm{A}{\mathrm{A}}_{\mathrm{t}-1}}+\hspace{0.17em}{\alpha }_2\hspace{0.17em}\left(\frac{\mathrm{\Delta }\mathrm{S}\mathrm{a}\mathrm{l}{\mathrm{e}}_{\mathrm{t}}-\hspace{0.17em}\mathrm{\Delta }\mathrm{A}\mathrm{C}{\mathrm{C}}_{\mathrm{t}}\hspace{0.17em}}{\mathrm{T}\mathrm{A}{\mathrm{A}}_{\mathrm{t}-1}}\right)+\hspace{0.17em}{\alpha }_3\hspace{0.17em}\frac{\mathrm{F}{\mathrm{A}}_{\mathrm{t}}}{\mathrm{T}\mathrm{A}{\mathrm{A}}_{\mathrm{t}-1}}$(2) , and (3)). LagASYM_L1 and LagSYN_L1 are the level-one lag of information asymmetry and stock synchronicity, respectively. AUDIT represents a firm’s audit quality, which receives a value of 1 if the firm is audited by a Big4 and a value of 0 if the firm is audited by other audit companies. FOWN is foreign ownership, measured as the rate of shares held by foreign investors. SIZE is calculated as the natural logarithm of the firm total assets’ market value. MOWN is the proportion of shares held by the company directors, their spouses, and children. AGE is the number of the year from the time of the first operation. LEV is the total debt-to-equity ratio.

Table A1. Descriptive statistics for negative and positive EM

	EM	EM <0	EM >0
Max	1.908	0.000	1.908
Min	−2.255	−2.255	0.000
Mean	0.134	−0.084	0.326
SD	0.427	0.117	0.141
No. of Observations	3,683	1,729	1,954

Note: EM stands for earnings management and is calculated through the model by Dechow et al. (1995) (see Equation 1(1) $\frac{TA{C}_t}{TA{A}_{t-1}}={\alpha }_0+{\alpha }_1\frac{1}{TA{A}_{t-1}}+{\alpha }_2\left(\frac{\mathrm{\Delta }Sal{e}_t-\mathrm{\Delta }AC{C}_t}{TA{A}_{t-1}}\right)+{\alpha }_3\frac{F{A}_t}{TA{A}_{t-1}}+{\epsilon }_t$(1) , Equation 2(2) $\mathrm{N}\mathrm{D}{\mathrm{A}}_{\mathrm{t}}=\alpha +\hspace{0.17em}{\alpha }_1\hspace{0.17em}\frac{1}{\mathrm{T}\mathrm{A}{\mathrm{A}}_{\mathrm{t}-1}}+\hspace{0.17em}{\alpha }_2\hspace{0.17em}\left(\frac{\mathrm{\Delta }\mathrm{S}\mathrm{a}\mathrm{l}{\mathrm{e}}_{\mathrm{t}}-\hspace{0.17em}\mathrm{\Delta }\mathrm{A}\mathrm{C}{\mathrm{C}}_{\mathrm{t}}\hspace{0.17em}}{\mathrm{T}\mathrm{A}{\mathrm{A}}_{\mathrm{t}-1}}\right)+\hspace{0.17em}{\alpha }_3\hspace{0.17em}\frac{\mathrm{F}{\mathrm{A}}_{\mathrm{t}}}{\mathrm{T}\mathrm{A}{\mathrm{A}}_{\mathrm{t}-1}}$(2) , and (3)).

Table A2. Descriptive statistics for FOWN and R-square of small groups

	Group 1 (FOWN >12.051)		Group 2 (FOWN <12.051)
	FOWN	R-square	FOWN	R-square
Max	77.525	0.960	12.014	0.872
Min	0.000	0.000	0.000	0.000
Mean	19.703	0.089	7.937	0.066
SD	27.211	0.115	6.258	0.074
No. of Observations	1,841		1,841

Note: R-square is the coefficient of determination calculated from the regression Equation 4(4) $ASY{M}_t=ln\left(1+\frac{SD\left(ForecastedEP{S}_t^q\right)}{\left|MedianofForecastedEP{S}_t^q\right|}\right)$(4) FOWN is foreign ownership, measured as the rate of shares held by foreign investors.

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