Managers' Incentives, Earnings Management Strategies, and Investor Sentiment

Zhonghai Yang, Roger Su, Qianqian Zhang and Ying Sun
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Zhonghai Yang: Accounting School, Harbin University of Commerce, China
Roger Su: Lecturer of Accounting, Auckland University of Technology, New Zealand
Qianqian Zhang: Accounting School, Harbin University of Commerce, China
Ying Sun: Accounting School, Harbin University of Commerce, China

International Journal of Business and Economics, 2014, vol. 13, issue 2, 157-180

Abstract: The impact of managers' incentives and earnings management methods on investor sentiment, based on 9581 listed firms in China from 2006 to 2011, is studied. This paper examines the influence of managers' incentives and earnings management methods on investor sentiment and intends to study how managers' incentives influence real earnings management (REM) and earnings management methods, and following on how REM and earnings management methods influence investor sentiment. The empirical results indicate that managers use REM to manipulate the earnings in order to be able to declare a profit, avoid loss, refinance, and change executives. The listed companies with higher executive compensations prefer to use accrual earnings management (AEM). However, making larger profits by using REM activities is not a universal phenomenon in China because the capital market in China is not efficient. This paper also finds that, when a company makes larger profits using REM activities, investors are optimistic. When a company uses AEM activities to increase earnings, investors readily recognize AEM and they become pessimistic.

Keywords: real earnings management (REM); accrual earnings management (AEM); management incentives; investor sentiment (search for similar items in EconPapers)
JEL-codes: F3 G1 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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