2. Review of literature

Arguably, since the late twentieth century the technology sector has increased its presence within society in every aspect. Its continued rise is now imminent and a

robust understanding of the sector is well in demand. Alongside the sector's rise, a myriad of listed technology companies have also grown in presence and influence in capital markets since its origins. Throughout its history, these high-technology investments have at times showcased behaviours of high-growth characteristics [9]. To understand the issues that the chapter aims to address, we provide the four core areas covered in the existing literature, consisting of the technology sector, financial crises, financial measures, and earnings management.

stocks in comparison to other sectors as well as the behaviour of different invest-

The Roles of Accounting Valuations and Earnings Management in the Survivorship of Technology…

To exemplify the scale of destruction that crises like the GFC produces, there has been examination of nine crisis episodes, including the GFC and the technology bubble, and their implications on equity markets and the incidence of contagion [3]. They identify the GFC as a global crisis having contagion effects in all the channels tested. Tests on the technology bubble show that it possess normal interdependencies as a result of the downturn. Our research will therefore seek to further evaluate the effects of the GFC specifically towards the technological sector.

There has been ongoing discussion on the predictive power that accounting and valuation metrics serve in explaining future performance and survivorship of listed technology firms [2, 4, 14]. Due to the nature of tech-firms' wide-ranging business operations, they tend not to have the same drivers of business growth or failure as other sector firms. Within technology remit, the general nature of operations may be heavily service-oriented when referring to the likes of software providers, or more product-driven such as those companies specialising in computer hardware. A lot of these companies may be travelling through their early growth stages, meaning investments and capital expenditure do not necessarily translate to earnings until

Furthermore, investment behaviour towards the sector has a track-record of being over-optimistic, as argued in the sector's early development and in the emergence of the 2000 technology-bubble [14]. The chapter recognises this thinking as a reflection based on the origins of the past tech-bubble, however our chapter seeks to enhance understanding in the contemporary links and similarities that the market expressed in the most recent crisis of 2008, and the key implications for equity

There has also been a wide-ranging scope of literature examining the phenomenon of companies practising earnings management. There has been explanations that earnings management occurs when managers use judgement in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting practices [15]. The academic discussion on this topic explores the possibility that earnings management may imply on the immediate and future performance of tech companies during financial crisis. There is further evidence showing that firms are likely to manipulate earnings in order to report small profits instead of losses during

Earnings management generally refers to the management of items such as increasing accruals, as well as cutting discretionary expenditure, such as advertising, selling, general and administrative expenses, and research and development (R&D). This is particularly relevant when looking at how companies manage earnings in preparation for reporting season and meeting analyst expectations. Certain findings indicate high-tech firms are more likely to use discretionary accruals to reward CEOs to meet their earnings expectations compared to low-tech firms [17]. Moreover, some studies make conclusions that firms who show higher levels of earnings management to beat forecasts typically outperform firms who do not

ment clienteles.

2.3 Accounting and valuation metrics

DOI: http://dx.doi.org/10.5772/intechopen.85395

much later on in their life-cycle.

2.4 Earnings management

periods of financial distress [16].

engage in this practise as much [18].

63

holders and creditors active within the sector.

### 2.1 The technology sector

Technology stocks have increased immensely in both presence and importance to global financial markets. For instance, from 1990 to 2000, technology firms have emerged from barely being existent to occupying six of the ten largest firms in the US, in terms of market capitalisation [10]. The National Association of Securities Dealers Automated Quotations (NASDAQ) index which is heavily weighted by technology stocks has grown over 29 times to reach a total market capitalisation of \$8.4tn.3 Moreover, the largest stocks in today's financial markets are concentrated to the largest of the technology pioneer companies, namely Apple, Alphabet, and Microsoft. This is testament to the prominence of technology in today's world. Technology firms arguably have adopted increasingly important roles in today's capital market [11].

Nevertheless, technology stocks have faced significant challenges. Particularly, in consequence of the technology bubble and crash of late-1999 to Spring 2000, the world experienced a monumental downturn in the technology sector that sent ripples of distress throughout international financial markets. The next crisis following this was the most recent sub-mortgage crash in 2008, which similarly sent devastating effects to global markets. As such, the periodic context that coincided with the growth of the technology sector was significantly more volatile than its preceding bull-run of the 1950s to 80s.

The explanations that have arisen behind the crisis in 2000 is critical for our study, and its objective of examining the technology sector's reaction to the most recent global financial crisis (GFC) that erupted in 2008. The causes of this credit crunch and its huge impact is explored by many scholars in the field, refer to [3, 12, 13]. The crisis is a prime foundation behind this study which explores the varying dynamics of the financial crises. Close to 8 years after, this presents an opportune moment to look into the consequent shaping of the technology sector and investigate the determinants behind the performance and survivorship in this post-crisis period.

#### 2.2 Financial crises

The cause of financial crisis is a recurring subject in economic history. Referring to the earlier 2000 technology-bubble, much discussion in the academic landscape has evolved in this field where its origins are commonly pointed to the overoptimistic behaviours expressed in the market towards the rise of Internet stocks. For example, some scholars advocate that the absence of traditional valuation metrics proved to be evidence for collective investor irrationality during the initial crash of the tech-sector [4]. As a result of this downturn, there has been a vast array of studies in the financial literature which has examined causes and impacts of the bubble. Two key areas of study have observed technology stocks in: (1) the valuation space, and how traditional metrics may not be as applicable to tech-stocks; and (2) the investment perspective looking at the various co-movements of technology

<sup>3</sup> Data from Bloomberg Terminal.

The Roles of Accounting Valuations and Earnings Management in the Survivorship of Technology… DOI: http://dx.doi.org/10.5772/intechopen.85395

stocks in comparison to other sectors as well as the behaviour of different investment clienteles.

To exemplify the scale of destruction that crises like the GFC produces, there has been examination of nine crisis episodes, including the GFC and the technology bubble, and their implications on equity markets and the incidence of contagion [3]. They identify the GFC as a global crisis having contagion effects in all the channels tested. Tests on the technology bubble show that it possess normal interdependencies as a result of the downturn. Our research will therefore seek to further evaluate the effects of the GFC specifically towards the technological sector.

### 2.3 Accounting and valuation metrics

robust understanding of the sector is well in demand. Alongside the sector's rise, a myriad of listed technology companies have also grown in presence and influence in capital markets since its origins. Throughout its history, these high-technology investments have at times showcased behaviours of high-growth characteristics [9]. To understand the issues that the chapter aims to address, we provide the four core areas covered in the existing literature, consisting of the technology sector, financial

Accounting and Finance - New Perspectives on Banking, Financial Statements and Reporting

Technology stocks have increased immensely in both presence and importance to global financial markets. For instance, from 1990 to 2000, technology firms have emerged from barely being existent to occupying six of the ten largest firms in the US, in terms of market capitalisation [10]. The National Association of Securities Dealers Automated Quotations (NASDAQ) index which is heavily weighted by technology stocks has grown over 29 times to reach a total market capitalisation of \$8.4tn.3 Moreover, the largest stocks in today's financial markets are concentrated to the largest of the technology pioneer companies, namely Apple, Alphabet, and Microsoft. This is testament to the prominence of technology in today's world. Technology firms arguably have adopted increasingly important roles in today's capital market [11]. Nevertheless, technology stocks have faced significant challenges. Particularly, in consequence of the technology bubble and crash of late-1999 to Spring 2000, the world experienced a monumental downturn in the technology sector that sent ripples of distress throughout international financial markets. The next crisis following this was the most recent sub-mortgage crash in 2008, which similarly sent devastating effects to global markets. As such, the periodic context that coincided with the growth of the technology sector was significantly more volatile than its

The explanations that have arisen behind the crisis in 2000 is critical for our study,

The cause of financial crisis is a recurring subject in economic history. Referring to the earlier 2000 technology-bubble, much discussion in the academic landscape has evolved in this field where its origins are commonly pointed to the overoptimistic behaviours expressed in the market towards the rise of Internet stocks. For example, some scholars advocate that the absence of traditional valuation metrics proved to be evidence for collective investor irrationality during the initial crash of the tech-sector [4]. As a result of this downturn, there has been a vast array of studies in the financial literature which has examined causes and impacts of the bubble. Two key areas of study have observed technology stocks in: (1) the valuation space, and how traditional metrics may not be as applicable to tech-stocks; and (2) the investment perspective looking at the various co-movements of technology

and its objective of examining the technology sector's reaction to the most recent global financial crisis (GFC) that erupted in 2008. The causes of this credit crunch and its huge impact is explored by many scholars in the field, refer to [3, 12, 13]. The crisis is a prime foundation behind this study which explores the varying dynamics of the financial crises. Close to 8 years after, this presents an opportune moment to look into the consequent shaping of the technology sector and investigate the determinants

behind the performance and survivorship in this post-crisis period.

crises, financial measures, and earnings management.

2.1 The technology sector

preceding bull-run of the 1950s to 80s.

2.2 Financial crises

<sup>3</sup> Data from Bloomberg Terminal.

62

There has been ongoing discussion on the predictive power that accounting and valuation metrics serve in explaining future performance and survivorship of listed technology firms [2, 4, 14]. Due to the nature of tech-firms' wide-ranging business operations, they tend not to have the same drivers of business growth or failure as other sector firms. Within technology remit, the general nature of operations may be heavily service-oriented when referring to the likes of software providers, or more product-driven such as those companies specialising in computer hardware. A lot of these companies may be travelling through their early growth stages, meaning investments and capital expenditure do not necessarily translate to earnings until much later on in their life-cycle.

Furthermore, investment behaviour towards the sector has a track-record of being over-optimistic, as argued in the sector's early development and in the emergence of the 2000 technology-bubble [14]. The chapter recognises this thinking as a reflection based on the origins of the past tech-bubble, however our chapter seeks to enhance understanding in the contemporary links and similarities that the market expressed in the most recent crisis of 2008, and the key implications for equity holders and creditors active within the sector.

#### 2.4 Earnings management

There has also been a wide-ranging scope of literature examining the phenomenon of companies practising earnings management. There has been explanations that earnings management occurs when managers use judgement in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting practices [15]. The academic discussion on this topic explores the possibility that earnings management may imply on the immediate and future performance of tech companies during financial crisis. There is further evidence showing that firms are likely to manipulate earnings in order to report small profits instead of losses during periods of financial distress [16].

Earnings management generally refers to the management of items such as increasing accruals, as well as cutting discretionary expenditure, such as advertising, selling, general and administrative expenses, and research and development (R&D). This is particularly relevant when looking at how companies manage earnings in preparation for reporting season and meeting analyst expectations. Certain findings indicate high-tech firms are more likely to use discretionary accruals to reward CEOs to meet their earnings expectations compared to low-tech firms [17]. Moreover, some studies make conclusions that firms who show higher levels of earnings management to beat forecasts typically outperform firms who do not engage in this practise as much [18].
