Does Accrual Management Impair the Performance of Earnings-Based Valuation Models?

Lucie Courteau, Jennifer L. Kao and Yao Tian

Journal of Business Finance & Accounting, 2015, vol. 42, issue 1-2, 101-137

Abstract: This study examines how accrual manipulations affect firm valuation in the years surrounding the passage of the Sarbanes-Oxley Act (SOX). We compare the absolute percentage pricing errors of RIM and DCF valuation models for a group of US firms suspected to have engaged in accrual manipulations to avoid a small loss or a small earnings decline vs. ‘Normal’ firms matched on industry, year and size. We find that RIM can better estimate intrinsic value than DCF for the matched Normal firms in the pre-SOX period, but not so for accrual manipulators, and that SOX mitigates the harmful effect of accrual manipulations, completely eliminating the difference in RIM's accuracy advantage over DCF between Normal firms and accrual manipulators. As a further analysis, we redefine Suspect firms as real-activity manipulators and find a significant across-group difference in accuracy wedge in both sample periods, implying that SOX has prompted firms to favor real-activity manipulations over accrual manipulations.

Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://hdl.handle.net/10.1111/jbfa.12101 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:jbfnac:v:42:y:2015:i:1-2:p:101-137

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0306-686X

Access Statistics for this article

Journal of Business Finance & Accounting is currently edited by P. F. Pope, A. W. Stark and M. Walker

More articles in Journal of Business Finance & Accounting from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().