Does Earnings Management Affect Firms’ Investment Decisions?

Abstract

This paper examines whether firms manipulating their reported financial results make suboptimal investment decisions. We examine fixed asset investments for a large sample of public companies during the 1978–2002 period and document that firms that manipulate their earnings—firms investigated by the SEC for accounting irregularities, firms sued by their shareholders for improper accounting, and firms that restated financial statements—over-invest substantially during the misreporting period. Furthermore, following the misreporting period, these firms no longer over-invest, consistent with corrected information leading to more efficient investment levels. We find similar patterns for firms with high discretionary revenues or accruals. Our findings suggest that earnings management, which is largely viewed as targeting parties external to the firm, can also influence internal decisions.

Financial Reporting Quality, Free Cash Flow, and Investment Efficiency

“…On the other hand, the existence of information asymmetry between the firm and investors could lead suppliers of capital to discount the stock price and to increase the cost of raising capital because investors would infer that firms raising funds are of a bad type (Myers and Majluf, 1984). Therefore, financial reporting quality mitigates information asymmetry and increase investment efficiency by reducing the costs of external financing for firms (McNichols and Stubben, 2008). Second, it is common argued that financial reporting quality plays an important role in mitigating agency problems between the managers and investors.…”

Financial Reporting Quality , Debt Maturity and Investment Efficiency in Companies Listed on the Warsaw Stock Exchange

“…Jednym z kluczowych założeń jest przyjęta miara odzwierciedlająca jakość sprawozdania finansowego. W literaturze zagranicznej można spotkać szereg innych miar, które mogą zostać wykorzystywane do mierzenia jakości sprawozdań finansowych (McNichols, Stubben 2008;Kasznik 1999;Dechow, Dichev 2002). Dodatkowo autor jedynie rozpatrzył efektywność realizowanych inwestycji przez polskie spółki, pozostawiając kontekst przeinwestowywania lub niedoinwestowywania, do zgłębienia w ramach dalszych badań.…”

“…Menedżerowie chcący realizować wartościowe projekty inwestycyjne, a jednocześnie mający ograniczony dostęp do finansowania zewnętrznego, wykazują większą skłonność do kształtowania wyników finansowych. Zwięk-sza to asymetrię informacji pomiędzy spółką a dostarczycielami zewnętrznego kapitału (McNichols, Stubben 2008). Badania przeprowadzone przez Biddle i in.…”

Examining the Relationship Between Disclosure Level, Ownership Structure and Earning Management in the Tehran Stock Exchange

“…Earnings management, which is done through accounting's statistics manipulation or manipulation of actual activities, decrease the accuracy of its message and increase the risk and loss of confidence from outsiders and also will likely lead to information asymmetry and decrease investment efficiency. Earnings management not only hides the actual performance of a firm but also hides the real growth process, earnings and firms revenue that are used to predict future growth of the firm (McNichols and Stubben, 2008). …”