Does Investors' Sophistication Affect Persistence and Pricing of Discretionary Accruals?

Lanfeng Kao ()
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Lanfeng Kao: Department of Finance, National University of Kaohsiung, No. 700, Kaohsiung University Road, Nan-Tzu District, Kaohsiung 811, Taiwan, R.O.C.

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2007, vol. 10, issue 01, 33-50

Abstract: This paper examines whether the sophistication of market investors influences management's strategy on discretionary accounting choice, and thus changes the persistence of discretionary accruals. The results show that the persistence of discretionary accruals for firms face with naive investors is lower than that for firms face with sophisticated investors. The results also demonstrate that sophisticated investors indeed incorporate the implications of current earnings components into future earnings in a more sufficient manner than naïve investors do.

Keywords: Managerial discretion; discretionary accruals; investors' sophistication (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2007
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DOI: 10.1142/S0219091507000945

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