Theses and Dissertations - UTB/UTPA
Date of Award
Doctor of Philosophy (PhD)
Dr. Thanh Ngo
Dr. Diego Escobari
Dr. Andre Mollick
Real activities manipulation involves changes made by firm’s managers to the normal business operations of the firm and consequently should affect the firm cash flows. Real activities manipulation can reduce firm value because actions taken in the current period to increase earnings can have a negative effect on cash flows in future periods. As such, real activities manipulation should deserve more attention from researchers. First, I attempt to explore the causality relationship between real activities manipulation and firm equity mispricing. Results show that firms with high real activities manipulation have lower level of equity mispricing while firms with high levels of accrual-based earning management experience more equity mispricing. The panel-VAR and three-stage least squared results support a causal relationship between mispricing index and real activities manipulation; mispricing index affects the level of accrual-based earning management and not vice versa. Thus, managers engage in real activities manipulation to influence stock prices. Second, I examine real activities manipulation by firms prior to their debt issues and how such activities can affect the yield spread (a proxy of cost of debt) on the issue. I document that bond-issuing firms increase their levels of real activities manipulation in the 5 quarters leading to the bond issues. More interestingly, I find that firms that engage in more real activities manipulation can issue debts at lower costs. Thus, bondholders fail to see through the real activities manipulation in pricing new debts. Third, I investigate whether speculators like option traders and short-sellers, known as “smart investors”, are able to position themselves accordingly in firms with more real activities manipulation. Results show that option traders target firms with highest level of real activities manipulation. Thus, option traders might have superior ability to interpret the use of real activities manipulation and accrual-based earning management by firms to increase the reporting earnings that will exert detrimental impacts in the future cash flows and stock price of the firms. On the other hand, I do not find supporting evidence that short sellers target firms with high levels of real activities manipulation.
University of Texas-Pan American
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