Does the market price the nature and extent of earnings management for firms that beat their earnings benchmark?

Camillo Lento, Julie Cotter and Irene Tutticci
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Julie Cotter: University of Southern Queensland, Toowoomba, QLD, Australia
Irene Tutticci: University of Queensland, Brisbane, QLD, Australia

Australian Journal of Management, 2016, vol. 41, issue 4, 633-655

Abstract: This study investigates whether the abnormal returns at the quarterly earnings announcement date varies according to the market’s expectations of the nature (informative vs opportunistic) and extent of discretionary accruals for firms that meet or beat expectations (MBE). In doing so, this study introduces an innovative model that measures the market’s expectation of the informativeness of earnings at the earnings announcement date and assesses the impact on the abnormal return for the interaction between the nature and expected extent of earnings management. A large sample of Standard & Poor’s (S&P) 500 firms that meet or exceed their earnings expectation over the period of 1998 to 2007 is analyzed. The results reveal that the expected extent of earnings management has a positive (negative) relation with the abnormal return when earnings management is informative (opportunistic).

Keywords: Earnings management; market pricing of discretionary accruals; meeting or beating expectations (search for similar items in EconPapers)
JEL-codes: G14 M41 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:41:y:2016:i:4:p:633-655

DOI: 10.1177/0312896216641600

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