Real Earnings Management and Information Asymmetry in the Equity Market

David Abad, M. Fuensanta Cutillas-Gomariz, Juan Pedro Sánchez-Ballesta and José Yagüe

European Accounting Review, 2018, vol. 27, issue 2, 209-235

Abstract: The literature suggests that real earnings management (REM) activities can increase adverse selection risk in capital markets. Due to their opacity and the difficulties in understanding their implications, REM strategies may increase the level of information asymmetry among investors. This paper examines the association between earnings management through real activities manipulation and information asymmetry in the equity market. To estimate the level of adverse selection risk we use a comprehensive index of information asymmetry measures proposed by the market microstructure literature. For a sample of Spanish listed firms, we find that firms’ strategies of increasing earnings through REM are associated with higher information asymmetry in those firms that meet last year’s earnings. Our findings are consistent with the hypothesis that earnings management through real activities manipulation garbles the market, enhances private information production, and exacerbates information asymmetry in the stock market.

Date: 2018
References: Add references at CitEc
Citations: View citations in EconPapers (21)

Downloads: (external link)
http://hdl.handle.net/10.1080/09638180.2016.1261720 (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:taf:euract:v:27:y:2018:i:2:p:209-235

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/REAR20

DOI: 10.1080/09638180.2016.1261720

Access Statistics for this article

European Accounting Review is currently edited by Laurence van Lent

More articles in European Accounting Review from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().