1. Introduction

The technology sector has rapidly gained importance in the past two decades. The NASDAQ Composite, which measures all the stocks on the tech-heavy NASDAQ market, surpassed its dotcom high in 2015.<sup>1</sup> Valuations are also close to the general market today, in sharp contrast to the extreme valuation gap seen in 2000.<sup>2</sup> Firms within the technology sector possess distinct aspects relative to nontechnology firms, examples being: innovation and technical advancement leading to high economic growth, opaque information causing moral hazard, longer investment horizon required for technology innovations, greater uncertainties in cash

<sup>1</sup> The transformation of the industry over the past 17 years has been significant. Technology companies are expected to generate more than 25% of the S&P 500's overall earnings in the fourth quarter of this year, compared with 15% at the index's peak in 2000. At that time, tech stocks accounted for more than a third of the benchmark S&P 500. Today that figure has fallen closer to 23%.

<sup>2</sup> Tech stocks trade at 19.4 times 2017 full-year earnings, while the S&P 500 is at 19 times. As per Bloomberg data, in the first quarter of 2000, S&P 500 technology groups traded at 73 times earnings.

flows and growth potentials. It is further asserted that greater litigation risk arises from information asymmetry [1]. Therefore, our goal is to analyse the reasons behind the rapid performance growth and change in survivorship in technology sector during of financial turmoil and its initial recovery of our 2008 global financial crisis. We evaluate the impact of accounting valuation and earnings management indicators considering special aspects of technology firms and our lesson from the technology bubble in 2000.

large firm size (MktCap), more R&D but with less discretionary earnings (DA) increase the survivorships of these firms. We confirm that practising earnings management introduces a double-edged sword for the technology firms since DA has positive and negative effects on the returns and survivorships, respectively particularly during the global financial crisis. R&D mostly increases both the returns and survivorships although the significance may vary. Furthermore, the moral hazard (ETHICS) within the technology firms tends to reduce their future

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

The underlying research question for this chapter considers whether in times of financial crisis, capital providers, including investors, equity providers, and debt holders could use accounting valuation, and earnings management variables in predicting the future performance and survivorship/failure of technology-firms. To investigate the research question, we consider the contingency theory as a fitting framework as it suggests that an optimal course is contingent on the circumstance or environment confronting the phenomenon being examined. This is because our study seeks to provide an explanation to phenomena that are dependent upon times

Keystone works utilising this contingency approach explore a diverse range of subjects, such as the usefulness of virtual learning environments in education amongst different sectors or groups [5–7], or the optimal conditions in organisations where certain IT implementations will be beneficial [8]. The same framework is applied to our investigation as we seek to identify which accounting valuation, and earnings management techniques are useful in explaining future performance and probability of failure contingent on times of crisis and periodic outlooks. Accordingly, we propose two hypotheses directly relevant to the issues for equity-holders

H1: Accounting valuation and earnings management metrics will be significant at different times of crises in explaining short- to long-term performance, and where they are significant they should follow the conventional relationship these measures have with

H2: Accounting valuation, earnings management, and past performance variables will be significant at different times of crises in explaining future firm failure, and when

For equity providers and investors of stock markets, this issue of being able to predict the performance of the firm is highly relevant as these groups typically seek to invest in businesses that are set for future success. If the investment is successful, they are rewarded with stock price returns. For debt holders, it is important that they are able to determine the probability of future failure and to assess whether the recipient of the loan would be able to pay-back or risk defaulting on their loan. For accurate prediction of these outcomes, a more robust risk-assessment of lending

The rest of the chapter is structured as follows: Section 2 is the literature review, Section 3 is the data and research design, Section 4 is the results and discussion of findings and Section 5 is the conclusion, implication of study and limitations.

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

on future performance, and creditors on future probability of failure:

returns while not significantly affecting their survivorships.

1.1 Development of the research hypothesis

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

they do, they adhere to conventional relationships.

of crisis.

future returns.

agreements is essential.

2. Review of literature

61

Currently there exists a gap in the academic discourse comparing the state of the technology sector during the crisis of 2008. Our study fills the present gap by reevaluating the sector in the aftermath of the most recent crisis and reflects on the findings drawn from preceding crisis of 2000. The current study seeks to evaluate whether the same findings drawn from the earlier crisis literature, referring to [2], are still relevant for capital providers and participants in the post-crisis period. Accordingly, our study sets a considerable contribution to current studies on the effects of valuation measures in the technology sector on the financial crisis, and whether these effects vary over the various periods of the crisis.

Secondly, previous studies limit their scope to analysing performance of stock returns [3, 4]. This chapter however focuses on examining both future performance and the survivorship of firms within the technology-sector. This is linked to our base understanding that accounting valuation and earnings management variables play a much greater role in determining future survivorship within this particular sector that has developed with large strides since the late twentieth century. Moreover, given the uniqueness of the technology sector, such as the larger existence of intangible assets, we anticipate that our evaluation encompassing linked variables such as discretionary accruals (DA) and research and development (R&D) expenditure will be a valuable contribution to the current technology sector literature. We examine how these effects are contingent on different time horizons, short and long run, and morality (ETHICS) of these technology firms' behaviours.

This chapter contributes to ongoing discussion in relation to the determining the effects of accounting valuation and earnings management variables in the performance and survivorship of technology firms during the financial crisis. The three core objectives of the study linked particularly towards future performance and survivorship are:


We find that our accounting valuation and earnings management techniques including R&D, market capitalization (MktCap), earnings to price ratio (EP), book to market ratio (BM), and discretionary accruals (DA) have stronger positive effects on longer term performance of the technology firms. In other words, undervaluation, larger firm size, and more discretionary earnings and R&D lead to higher returns which increase more with longer terms. On the other hand, undervaluation, The Roles of Accounting Valuations and Earnings Management in the Survivorship of Technology… DOI: http://dx.doi.org/10.5772/intechopen.85395

large firm size (MktCap), more R&D but with less discretionary earnings (DA) increase the survivorships of these firms. We confirm that practising earnings management introduces a double-edged sword for the technology firms since DA has positive and negative effects on the returns and survivorships, respectively particularly during the global financial crisis. R&D mostly increases both the returns and survivorships although the significance may vary. Furthermore, the moral hazard (ETHICS) within the technology firms tends to reduce their future returns while not significantly affecting their survivorships.

### 1.1 Development of the research hypothesis

flows and growth potentials. It is further asserted that greater litigation risk arises from information asymmetry [1]. Therefore, our goal is to analyse the reasons behind the rapid performance growth and change in survivorship in technology sector during of financial turmoil and its initial recovery of our 2008 global financial crisis. We evaluate the impact of accounting valuation and earnings management indicators considering special aspects of technology firms and our lesson from the

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

Currently there exists a gap in the academic discourse comparing the state of the technology sector during the crisis of 2008. Our study fills the present gap by reevaluating the sector in the aftermath of the most recent crisis and reflects on the findings drawn from preceding crisis of 2000. The current study seeks to evaluate whether the same findings drawn from the earlier crisis literature, referring to [2], are still relevant for capital providers and participants in the post-crisis period. Accordingly, our study sets a considerable contribution to current studies on the effects of valuation measures in the technology sector on the financial crisis, and

Secondly, previous studies limit their scope to analysing performance of stock returns [3, 4]. This chapter however focuses on examining both future performance and the survivorship of firms within the technology-sector. This is linked to our base understanding that accounting valuation and earnings management variables play a much greater role in determining future survivorship within this particular sector that has developed with large strides since the late twentieth century. Moreover, given the uniqueness of the technology sector, such as the larger existence of intangible assets, we anticipate that our evaluation encompassing linked variables such as discretionary accruals (DA) and research and development (R&D) expenditure will be a valuable contribution to the current technology sector literature. We examine how these effects are contingent on different time horizons, short and long

This chapter contributes to ongoing discussion in relation to the determining the effects of accounting valuation and earnings management variables in the performance and survivorship of technology firms during the financial crisis. The three core objectives of the study linked particularly towards future performance and

I. to determine the level of explanatory power of valuation and accounting metrics in determining the short- to long-term performance of securities within the technology sector throughout the most recent global financial

II. to examine whether valuation and accounting metrics hold predictive power in explaining the future survivorship or failure of technology firms

III. to investigate how the technology firms' moral hazard (i.e. opportunistic behaviour) affect their future returns and survivorships during and after

We find that our accounting valuation and earnings management techniques including R&D, market capitalization (MktCap), earnings to price ratio (EP), book to market ratio (BM), and discretionary accruals (DA) have stronger positive effects on longer term performance of the technology firms. In other words, undervaluation, larger firm size, and more discretionary earnings and R&D lead to higher returns which increase more with longer terms. On the other hand, undervaluation,

whether these effects vary over the various periods of the crisis.

run, and morality (ETHICS) of these technology firms' behaviours.

in the immediate and post-crisis period; and

technology bubble in 2000.

survivorship are:

60

crisis (GFC) period;

the GFC period.

The underlying research question for this chapter considers whether in times of financial crisis, capital providers, including investors, equity providers, and debt holders could use accounting valuation, and earnings management variables in predicting the future performance and survivorship/failure of technology-firms. To investigate the research question, we consider the contingency theory as a fitting framework as it suggests that an optimal course is contingent on the circumstance or environment confronting the phenomenon being examined. This is because our study seeks to provide an explanation to phenomena that are dependent upon times of crisis.

Keystone works utilising this contingency approach explore a diverse range of subjects, such as the usefulness of virtual learning environments in education amongst different sectors or groups [5–7], or the optimal conditions in organisations where certain IT implementations will be beneficial [8]. The same framework is applied to our investigation as we seek to identify which accounting valuation, and earnings management techniques are useful in explaining future performance and probability of failure contingent on times of crisis and periodic outlooks. Accordingly, we propose two hypotheses directly relevant to the issues for equity-holders on future performance, and creditors on future probability of failure:

H1: Accounting valuation and earnings management metrics will be significant at different times of crises in explaining short- to long-term performance, and where they are significant they should follow the conventional relationship these measures have with future returns.

H2: Accounting valuation, earnings management, and past performance variables will be significant at different times of crises in explaining future firm failure, and when they do, they adhere to conventional relationships.

For equity providers and investors of stock markets, this issue of being able to predict the performance of the firm is highly relevant as these groups typically seek to invest in businesses that are set for future success. If the investment is successful, they are rewarded with stock price returns. For debt holders, it is important that they are able to determine the probability of future failure and to assess whether the recipient of the loan would be able to pay-back or risk defaulting on their loan. For accurate prediction of these outcomes, a more robust risk-assessment of lending agreements is essential.

The rest of the chapter is structured as follows: Section 2 is the literature review, Section 3 is the data and research design, Section 4 is the results and discussion of findings and Section 5 is the conclusion, implication of study and limitations.
