University of Oulu

Accounting environment impact on use of discretionary accruals to raise financing by financially constraint firms with positive projects

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Author: Abdia, Meerab1
Organizations: 1University of Oulu, Oulu Business School, Department of Accounting, Accounting
Format: ebook
Version: published version
Access: open
Online Access: PDF Full Text (PDF, 1.8 MB)
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Language: English
Published: Oulu : M. Abdia, 2018
Publish Date: 2018-06-07
Thesis type: Master's thesis
Tutor: Middleton, Alexandra
Reviewer: Sahlström, Petri
Middleton, Alexandra
The study was conducted to examine the effect of accounting environment on use of discretionary accruals by constrained firms in order to raise finance by debt and equity. For the purpose of the study Germany was chosen as code law country and United Kingdom was chosen as common law country. The data included firms listed on Deutsche Börse Stock Exchange and London Stock Exchange. Data was collected for years 1990 to 2015. Regression analysis was done on 7827 firm year observations. Modified Jones model was used to determine discretionary accruals and lagged year return on assets was added to Modified Jones model to adjust for performance. Performance adjusted accruals were called abnormal accruals in the study. Net leverage, free cash flow and KZ index methods were used as constraint measures and capital expenditure has been used as investment opportunity. Pooled regression controlled for year effect was performed to capture the influence of time series trends. All the models have insignificant results, but when pooled regressions controlled for year effect were run significant results were obtained. For first hypothesis pooled regression controlled for years by net leverage constraint has significant results revealing that common law countries have lower accruals for constrained firm with investment opportunity. This can be because in common law countries firms signal growth to investors by income decreasing accounting choices as it is taken as positive signal. On the other hand, in code law countries firms can use discretionary accruals to get waivers and debt at low cost. Furthermore, for second hypothesis only pooled regression accounting for year on debt financing using net leverage have significant results revealing that when discretionary accruals are used more debt financing is raised by financially constrained firm with investment opportunity in common law countries as compared to code law countries. This can be because in common law countries firms are not closely monitored by banks as financial disclosure is considered high in such countries. Results were insignificant for pooled regression controlled for year effect for raising equity. However, for all pooled regression controlled for year effect for debt and equity raised significant results were obtained for result that more equity and debt is raised by financially constrained firm when they have positive projects. The study results will help investors in respective accounting environments to make financing decisions. Moreover, it will assist managers to make corporate and financing decisions using accruals. The study also adds to literature of signaling and opportunistic hypothesis. However, future research is needed to examine the motivation of accrual use in different accounting environments.
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