Title

Revenue Manipulation and Restatements by Loss Firms

Authors

Authors

J. L. Callen; S. W. G. Robb;D. Segal

Comments

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Abbreviated Journal Title

Audit.-J. Pract. Theory

Keywords

revenue manipulation; earnings management; auditing; restatements; SEASONED EQUITY OFFERINGS; EARNINGS MANAGEMENT; EMPIRICAL-ANALYSIS; INTERNET FIRMS; AUDITORS; PERFORMANCE; INFORMATION; Business, Finance

Abstract

This paper investigates the relation between the extent of a firm's past and expected future losses or negative cash flows and the ex ante probability that it will manipulate revenues. When a firm has a string of losses or negative cash flows, traditional valuation models do not yield reliable estimates of firm value, and traditional price-earnings ratios are not meaningful. Evidence suggests that market participants tend to value loss firms on the basis of the level and growth in revenues, rather than cash flows and earnings, thereby motivating these firms to overstate revenue. In fact, empirical results indicate that there is a positive relation between the number of years that firms exhibit and/or anticipate losses or negative cash flows and investment in receivables after controlling for credit policy. We further show that the ex ante likelihood that firms manipulate revenue in violation of GAAP is positively associated with the history of past and expected future losses or negative cash flows, as well as with the investment in accounts receivable (adjusted for credit policy). Our results suggest another indicator of manipulation that may be used by auditors and regulators in identifying firms that are more likely to overstate revenues.

Journal Title

Auditing-a Journal of Practice & Theory

Volume

27

Issue/Number

2

Publication Date

1-1-2008

Document Type

Article

Language

English

First Page

1

Last Page

29

WOS Identifier

WOS:000265151200001

ISSN

0278-0380

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