ASSET RETURNS UNDER PERIODIC REVELATIONS OF EARNINGS MANAGEMENT
Bo Sun
International Economic Review, 2014, vol. 55, issue 1, 255-282
Abstract:
The article investigates stock return dynamics in an environment where executives have an incentive to maximize their compensation by artificially inflating earnings. A principal–agent model with financial reporting and managerial effort is embedded in a Lucas asset‐pricing model with periodic revelations of the firm's underlying profitability. The return process generated from the model is consistent with a range of empirical regularities observed in the return data: volatility clustering, asymmetric volatility, and high idiosyncratic volatility. The calibration results further indicate that earnings management can be quantitatively important in accounting for the dynamic patterns of stock returns.
Date: 2014
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https://doi.org/10.1111/iere.12048
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Persistent link: https://EconPapers.repec.org/RePEc:wly:iecrev:v:55:y:2014:i:1:p:255-282
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