Home • PRRES Inc. Journal • Read the Journal

Earnings Management: A Case of New Zealand Listed Property Trusts

Author/s: Xuemei Liao, Zhi Dong, James Young

Date Published: 1/01/2011

Published in: Volume 17 - 2011 Issue 1 (pages 92 - 109)

Abstract

Existing literature of earnings management focuses on a wide range of firms and large corporations. However, LPTs are usually limited in the use of accruals for earnings management because of the characteristics of real estate investment. This paper examines earnings management strategies among New Zealand LPTs by using itemized contributing elements of total cash flow incorporating fundamental direct property data, such as average lease term and vacancy rates. Using White’s heteroscedastic-correction estimate, the model specification using total cash flow rather than itemized elements revealed significant results for average lease term and accruals playing little role in future earnings. When itemized elements of total cash flow were analyzed, fundamental property variables were not significant, with contributory elements of total cash flow providing the best estimator of earnings next period. These findings suggest that New Zealand LPTs use different earnings management strategies than the literature dealing with a wide variety of firms would suggest. Additionally, this paper reveals that when contributory elements of cash flow are available to investors, that indicators of fundamental underlying direct property performance is of limited benefit for estimating earnings.

Download Full Article

Download the Full Article PDF

14445921.2011.11104319.pdf 14445921.2011.11104319.pdf (205kB)

Keywords

Accounting Accruals - Average Lease Term - Earnings Management - Listed Property Trusts - Vacancy Rate

References

  • Ambrose, B.W. & Bian, X. (2010). Stock Market Valuation and REIT Earnings Management. Journal of Real Estate Research, 32 (1), 101–138.
  • Beneish, M. D. and Nichols, D. C. (2005). Earnings Quality and Future Returns: The Relation Between Accruals and the Probability of Earnings Manipulation. Social Science Research Network (SSRN) paper #725162.
  • Bradley, M., Capozza D.R. and Seguin, P.J. (1998). Dividend Policy and Cash-Flow Uncertainty. Real Estate Economics, 26(4), 555–580.
  • Bugshan, T. O. (2005). Corporate Governance, Earnings Management, and the Information Content of Accounting Earnings: Theoretical Model and Empirical Tests, PhD, ePublications@Bond University, Faculty of Business.
  • Chan, K., L. Chan, N. Jegadeesh, and J. Lakonishok. (2006). Earnings Quality and Stock Returns. Journal of Business, 79 (3), 1041–1082.
  • Collins, D.W., Kothari, S.P., and Ravburn, J.D. (1987). Firm Size and the Information Content Of Prices With Respect To Earnings. Journal of Accounting and Economics July, 111–138.
  • Dipasquale, D. and Wheaton, W. C. (1992). The Market for Real Estate Assets and Space: A Conceptual Framework. Journal of the American Real Estate and Urban Economics Association, 20, 181–197.
  • Edelstein, R., Liu, P. and Tsang, D. (2008). Real Earnings Management and Dividend Payout Signals: A Study for U.S. Real Estate Investment Trusts. American Real Estate and Urban Economics International Conference and Asian Real Estate Society Conference, Shanghai, July 2008.
  • Geltner, D. (1990). Return Risk and Cash Flow Risk with Long-term Riskless Leases in Commercial Real Estate. Real Estate Economics, 18(4), 377–402.
  • Graham, J.R., Harvey, C.R., and Rajgopal, S., (2005). The Economic Implications of Corporate Financial Reporting. Journal of Accounting and Economics, 40, 3–73.
  • Healy, P.M., and Wahlen, J.M. (1999). A Review of the Earnings Management Literature and Its Implications for Standard Setting. Accounting Horizons, 13, 365–383.
  • Keenan, C. (2008). Behind the Numbers. Black Enterprise, 38(12), 35.
  • Leuz, C., Nanda, D. and Wysocki, P. (2003). Earnings Management and Investor Protection: An International Comparison. Journal of Financial Economics, 69, 505–527.
  • Levy, D. (2005). Conceptualising the Influence of Clients on Valuations. Unpublished PhD Thesis, University of Auckland.
  • Lo, K. (2008). Earnings Management and Earnings Quality. Journal of Accounting and Economics, 45, 350–357.
  • Moricz, Z. and Murphy, L. (1997). Space Traders: De-regulation, Property Companies, and Auckland’s Office Market, 1975–1994. International Journal of Urban and Regional Research, 21(2), 165–179.
  • Murphy, L. (2008). Globalising Commercial Property Markets: The Development and Evolution of the Listed Property Trust Sector in New Zealand. Chapter 7, 73–84. In Tamasy, C. and Taylor, M. (Eds.) Globalizing Worlds and New Economic Configurations, Ashgate: London.
  • Ooi, J.T. L. (2001). Dividend Payout Characteristics of U.K. Property Companies, Journal of Real Estate Portfolio Management, 7(2), 133–142.
  • Ou, J., and Penman, S. (1989). Financial Statement Analysis and the Prediction of Stock Returns, Journal of Accounting & Economics, 11, 295–329.
  • Roychowdhury, S., (2006). Management of Earnings Through the Manipulation of Real Activities That Affect Cash Flow From Operations. Journal of Accounting and Economics, 42, 335–370.
  • Sloan, R.G. (1996). Do Stock Prices Fully Reflect Information in Accruals and Cash Flow About Future Earnings? The Accounting Review, 71 (3), 289–315.
  • Tse, R. (1999). Lag Vacancy, Effective Rents and Optimal Lease Term. Journal of Property Investment and Finance, 17(1), 75–88.
  • Wang, K., Erickson, J., and Gau, G.W. (1993). Dividend Policies and Dividend Announcement Effects for Real Estate Investment Trusts, Journal of the American Real Estate and Urban Economics Association, 21(2), 185–201.