Sentiment and Accruals Earnings Management: Does Governance and Regulatory Environment Matter?

Kakul Modani, Saumya Ranjan Dash, Mehul Raithatha and Robert Brooks
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Kakul Modani: Indian Institute of Management Indore, Madhya Pradesh, India
Saumya Ranjan Dash: Indian Institute of Management Indore, Madhya Pradesh, India
Mehul Raithatha: Indian Institute of Management Indore, Madhya Pradesh, India
Robert Brooks: Monash University, Clayton Victoria, Australia

American Business Review, 2023, vol. 26, issue 2, 314-354

Abstract: This paper examines the implications of firm-level governance mechanisms and the regulatory environment on the relationship between investor sentiment and accrual-based earnings management. Our findings confirm the positive impact of sentiment on earnings management through accruals. Our results confirm that in the presence of a stringent regulatory environment, the likelihood of abnormal accruals following a positive sentiment environment is low. We document that a stringent regulatory environment reduces the likelihood of abnormal accruals following a positive sentiment environment. Results further confirm that improved governance characteristics like larger board, increased board independence, and stringent related party transaction norms help to monitor corporate behaviour and mitigates opportunistic earnings management activity of managers with an exogeneous effect of market sentiment. Thus, our results have important implications for regulators and policymakers for strengthening the regulatory and monitoring environment. Investors may also use earnings announcement news during an optimistic market sentiment scenario in a more informative way.

Keywords: Accruals; Earnings Management; Emerging Market; Investor Sentiment; Managerial Optimism (search for similar items in EconPapers)
JEL-codes: L10 (search for similar items in EconPapers)
Date: 2023
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