Microsoft Word 2007 ichrie conference Proceedings Final-Final 06-06-07. doc

 
2007 Annual International CHRIE Conference & Exposition 
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we include Marcapta as an additional control variable. Regardless of the this curious result, the basic result that 
emerges out of the regression models is that the manipulation indices are positively and significantly related to 
changes in market capitalization. 
CONCLUSIONS AND RECOMMENDATIONS 
The surprising result is that markets appear to be rewarding firms that are manipulating earnings. This is 
really surprising because we had expected that those earnings manipulations that can easily be estimated will be 
punished (not rewarded) by the markets. It is widely understood most managers believe in a pattern of increasing 
earnings. However, we were considerably surprised by the significantly positive correlation. Most forms of market 
efficiency indicate that investors who discover that firms manipulate earnings upwards would penalize the firm. A 
very clear way for the market participants to signal that it understands earnings manipulation is by changing the 
stock price, thereby impacting market capitalization. Therefore, we consider our results to be preliminary at this 
point and hope that other researchers explore this important area of research in the hospitality industry. 
We believe that there are many factors that may have impacted the results. It is possible that earnings 
manipulation is not measured efficiently by the Beneish indices in the restaurant industry. Another factor is that in 
this paper our perspective is relatively short term. As recent history has shown, manipulation of earnings at firms 
such as Enron had a very positive impact on the stock price in the short term. The long term, is of course, is another 
story. Finally there might be other factors that are unique to the hospitality industry that we have not considered in 
our study. 
These results could provide a basis for further research in at least three possible ways. There is need to 
explore other possible ways to measure earnings manipulation in the hospitality industry. Secondly, we could take a 
longer term perspective to see if managers consistently manipulate earnings and the reaction of the markets in the 
long run. However, there are many problems in measuring long term reactions to one-time events. All the 
econometric issues and other events would have to be controlled for in long term studies. Finally, we need to 
explore industry specific factors that might be impacting the results. The first step has been taken in this paper 
because until we identify problems using mainstream financial research, we will not know what issues to explore.