Investor expectations, earnings management, and asset prices

Kai Du

Journal of Economic Dynamics and Control, 2019, vol. 105, issue C, 134-157

Abstract: This paper examines the implications of investor expectations for the joint determination of earnings manipulation and asset prices. Three alternative models of investor expectations are studied: constant-gain learning, regime-shifting beliefs, and accounting-information-system (AIS) beliefs. I use the simulated method of moments (SMM) to estimate the most plausible model that matches the actual data. AIS beliefs and regime-shifting beliefs are shown to best explain the empirical moments of 63% and 32% of S&P 500 firms, respectively. Regression analysis suggests that the three models offer different predictions on the existence and magnitude of several empirical regularities including a positive earnings response coefficient, the discretionary accruals anomaly, and return momentum.

Keywords: Earnings management; Accruals; Investor expectations; Behavioral bias; Empirical regularities; Simulated method of moments (search for similar items in EconPapers)
JEL-codes: C73 G12 G40 M41 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:105:y:2019:i:c:p:134-157

DOI: 10.1016/j.jedc.2019.06.002

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