Research shows that some corporate executives skew earnings to influence the market and inflate share price. Photo via Pexels

Say a company called CoolConsumerGoodsCo has just released its quarterly earnings report, revealing significantly higher profits than its consumer goods industry counterparts.

That result might spur analysts to slap a buy rating on the stock and investors to snap up shares. In an ideal world, the market wouldn't have to consider the possibility that the numbers aren't legit — but then again, it's not an ideal world. (Enron, anyone?)

Rice Business professors Brian R. Rountree and Shiva Sivaramakrishnan, along with Andrew B. Jackson at UNSW in Australia, studied what makes business leaders more likely to engage in fraudulent earnings reporting. Specifically, they focused on the relationship between this kind of misrepresentation and the degree to which a company's earnings are in line with the rest of its industry — a variable the researchers term "co-movements."

Many people are familiar with a similar variable, calculated using stock returns often referred to as a company's beta. The authors adapted the stock return beta to corporate earnings to see how a company's earnings move with earnings at the industry level.

The researchers hypothesized that the less in sync a company's earnings are with its industry, the higher the chance a company's leaders will manipulate earnings reports. They started with the well-accepted premise that corporations try to skew earnings reports to influence the market. The primary motive is typically to raise the company's stock price, as when an executive tries to "choose a level of bias" that balances potential fallout of getting caught against the benefits of a higher stock price.

To test their prediction, the professors analyzed a sample of enforcement actions taken by the U.S. Securities and Exchange Commission against companies for problematic financial reporting from 1970 to 2011 — although they noted that given the SEC's limited resources, the number of enforcement actions probably underestimates the actual amount of earnings manipulation in the market.

Their analysis revealed that firms with low earnings co-movements (meaning their earnings were out of sync with industry peers) were more likely to be accused by the SEC of reporting misdeeds. They concluded that the degree of earnings co-movement determines the probability of earnings manipulation. Put another way, earnings co-movements are a "causal factor" in the chances of earnings manipulations — and to a significant degree. The researchers found that firms who don't co-move with the market are more than 50 percent more likely to face an SEC enforcement action, compared with firms who are perfectly aligned with the market.

The researchers drilled deeper into the data to study whether the odds changed depending on the industry, since past research has indicated that the amount of competition in an industry works to constrain misreporting. That premise seems to hold true, the researchers concluded. In industries with more competitive markets, the impact of low co-movement on earnings manipulation is moderated.

They also studied whether the age of a firm played a part in the likelihood of earnings manipulation. Newer firms often rely more on stock compensation, which could be a motive for manipulating earnings reporting to drive up share price. Indeed, younger firms were more susceptible to misreporting when their earnings were out of whack with the rest of the marketplace.

Every firm faces some risk of misreporting, however. Even for public companies under analyst scrutiny, low co-movement proved to be a driver of earnings manipulation. But companies known for conservative reporting tend to be less likely to exaggerate their earnings, in general; these firms typically recognize losses in a more timely manner, the professors found.

These findings suggest a number of future lines of research. For example: When do executives underreport earnings? And can analyzing patterns related to cash flow reporting help better isolate earnings manipulation?

In the meantime, if you come across a company like CoolConsumerGoodsCo with an earnings report that's widely out of sync with the rest of its industry, you might think twice before rushing to buy in.

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This article originally ran on Rice Business Wisdom and is based on research from Brian R. Rountree, an associate professor of accounting at the Jones Graduate School of Business at Rice University, and Shiva Sivaramakrishnan is the Henry Gardiner Symonds Professor of Accounting at Rice Business.

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Houston startup raises $6M to scale home-based healthcare platform

fresh funding

As healthcare systems race to expand care beyond hospitals and into the home, investors are placing bigger bets on the infrastructure needed to make that shift possible.

This month, Rosarium Health announced it has raised $6 million in seed funding led by Kalos Ventures, with participation from ResilienceVC, Rock Health Capital, Symphonic Capital, Black Tech Nations Ventures and others.

The investment will help the Houston-based startup continue to build its platform, which features a national network of 800-plus clinicians and 3,000-plus contractors to coordinate home accessibility upgrades and modifications for seniors and people living with disabilities.

For founder and CEO Cameron Carter, the company’s mission grew out of firsthand caregiving experiences.

“From my own personal caregiving experiences, I realized that the benefits exist on paper, but not in reality,” Carter said in a news release. “Families are being left to figure out the paperwork and installations all on their own, which shouldn’t be how this works.”

While Medicare Advantage and Medicaid plans have expanded coverage for home-based services and accessibility modifications, the logistics behind delivering those services often remain fragmented.

Rosarium’s platform coordinates the entire process, from clinical assessments and referrals to contractor management, documentation, reimbursement and installation.

“A clinician can document that a home isn’t safe and a plan can approve a benefit, but there’s no one that’s responsible for making sure the work actually gets done,” Carter says. “We built the missing piece.”

The company was founded in 2021 as Rose Health and was a 2023 participant in the Texas Medical Center’s Accelerator for HealthTech program. It has scaled quickly, building a network of more than 800 clinicians and 3,000 contractors across 34 states.

Rosarium is currently in-network for 1.2 million Medicare and Medicaid lives, with projected coverage expected to reach nearly 4 million by the end of the year, according to the release.

“We’re excited to back Cameron because he and the team at Rosarium are building the infrastructure healthcare needs right now to make the home a safe and comfortable place of care,” Kate Ballinger, investor at Kalos Ventures, added in the release.

As part of the recent investment, Ballinger will join Rosarium’s board of directors.

With eyes on the future, Rosarium plans to grow its partnerships with Medicaid and Medicare Advantage plans, including CalViva and Community Health Plan of Imperial Valley, strengthening its presence in California while expanding access to underserved communities.

Additionally, Carter predicts that home-based healthcare will be part of a broader transformation happening across the industry.

“There’s a growing recognition that health outcomes are shaped by what happens in the home,” he said in the release. “The future of healthcare isn’t just treating people after something goes wrong. It’s creating environments that help prevent those problems in the first place.”

Houston business mogul Tilman Fertitta acquires Caesars in $17.6B deal

Money Moves

Houston billionaire Tilman Fertitta may currently be serving as America’s ambassador to Italy, but his company is as busy as ever. Fresh off its move to revive the Houston Comets WNBA franchise, his company, Fertitta Entertainment, has announced a $17.6 billion deal to acquire Caesars Entertainment, Inc.

Speculation about the deal has been circulating since at least March, according to various media reports. The deal combines Fertitta’s well-known Golden Nugget casino brand with all of the properties in the Caesars’ portfolio, including Las Vegas hotels Caesars Palace, Harrah's, Paris Las Vegas, Planet Hollywood, Horseshoe, The LINQ Hotel, Flamingo, and The Cromwell.

Overall, the combined company will include 60 domestic casino resorts and gaming facilities; online gaming including sports betting, iCasino, and Caesar’s online poker platform; retail sports betting at over 200 third-party locations through the William Hill brand; and over 550 Fertitta Entertainment outlets, including more than 450 Landry's full-service restaurants across America. The companies will combine their loyalty programs, Caesars Rewards, Golden Nugget's 24 Karat Select Club, and Landry's Select Club.

The terms will see Caesars’ shareholders receive $31 per share. Fertitta Entertainment will also acquire approximately $11.9 billion of Caesars' outstanding debt.

The transaction will be financed through a combination of equity contributed by Fertitta Entertainment, assumed Caesars' debt, and new committed debt financing arranged by a group consisting of 10 banks. It is subject to approval by Caesars’ shareholders and government regulators.

Fertitta Entertainment is the Houston-based company behind a diverse array of hospitality businesses, including The Golden Nugget, The Post Oak Hotel, River Oaks District, the Kemah Boardwalk, and Houston’s Downtown Aquarium.

It also operates a number of prominent restaurant brands, including Mastro's Restaurants, Del Frisco's Double Eagle Steakhouse, Morton's The Steakhouse, The Palm, McCormick & Schmick's, Landry's Seafood House, The Oceanaire Seafood Room, and Saltgrass Steak House.

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This article first appeared on CultureMap.com.