Earning Investor Trust: The Role of Past Earnings Management

Florian Eugster and Alexander Wagner
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Florian Eugster: Stockholm School of Economics

No 17-31, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: HDoes earnings management, even though legal, hamper investor trust in reported earnings? Or do investors regard earnings management as a way for firms to convey private information, or simply as a neutral feature of financial reporting? We find that past abstinence from earnings management increases investor responses to future earnings surprises. Importantly, this effect occurs where managers would in the past have had strong incentives and ample opportunities to misrepresent earnings. Overall, investors seem to interpret the extent to which management resists temptations for misreporting as a “litmus test” of trustworthiness.

Keywords: Earnings management; earnings response; credibility; trust (search for similar items in EconPapers)
JEL-codes: G14 G30 M41 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2017-05, Revised 2018-03
New Economics Papers: this item is included in nep-cfn
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Journal Article: Earning investor trust: The role of past earnings management (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1731

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