Investor reaction to earnings management

Abstract

Purpose-The purpose of this paper is to investigate whether earnings management that surpasses a threshold is associated with market mispricing. Design/methodology/approach-The paper examines the level of discretionary current accruals (DCA) as a proxy for earnings quality. Operationally the threshold of earnings management is defined as the mean DCA, and it is assumed that highly managed firms (both income-decreasing and incomeincreasing) produce low-quality earnings information. It is postulated that such management may lead to mispricing errors by investors who make incorrect adjustments for lower earnings quality. Findings-The evidence suggests that investors possess idiosyncratic perceptions toward earnings management. Investors of income-decreasing firms tend to under-adjust for analyst optimism, while investors of income-increasing firms are inclined to over-adjust for analyst optimism. In addition, investors of both types of highly managed firms appear to under-adjust for earnings management. These investor characteristics result in a post-earnings announcement upward drift of cumulative abnormal returns (CARs) for income-decreasing firms and a downward drift for income-increasing firms. Practical implications-The findings strongly indicate that there is a significant mispricing at the earnings announcement date for the income-decreasing (P1) and income-increasing (P5) portfolios and the mispricing persists in the short run. Thus, it may be possible for investors to exploit the mispricing by holding a long position in P1 and a short position in P5. Originality/value-Prior studies concentrate on extreme cases of earnings management that are subject to securities and exchange commission (SEC) enforcement. In contrast to these studies, this paper focuses on the market reaction to earnings management, which may or may not lead to SEC enforcement actions.

Earnings management, business strategy, and bankruptcy risk: evidence from Indonesia

“…Earnings management occurs when management exert their influence to deliberately alter the truth and fairness of a financial statement with the purpose of either concealing real economic condition or attaining private gain out of contractual outcomes which rely on accounting numbers (Healy and Wahlen, 1999). Although earnings management does not belong to fraud, as it is still in accordance with the prevailing financial reporting standards of IFRS and GAAP (Stolowy and Breton, 2004) and is frequently used as a strategy in financial reporting to the extent that it is still capable of providing value-relevant information (Kwag and Stephens, 2009), when earnings management obscures investors' rational calculation, the devastating effect is undeniable since it can degrade the quality of information related to profits presented in the financial statements. The low quality of information contained in the financial statements will adversely affect the company's financial performance (Soewarno, 2018).…”

Sustainability Concerns and Investor Responses to Earnings Announcements

“…Some researchers use accounting method variables as a proxy for the earnings quality, which is essentially only a signal of earnings quality. Other researchers use variables other than accounting methods as a proxy for accounting earnings quality, which in essence only shows signals about earnings quality, for example auditor quality variables (Okolie, 2014), broad voluntary expressions (Fernando et al, 2018), accounting conservatism (Heflin et al, 2015), earnings management (Kwag & Stephens, 2010;Suprianto et al, 2017), auditor industry specialization (Okolie, 2014), corporate governance (Ahmed, 2013;Mukhtaruddin et al, 2019), and sustainability concerns (Kim et al, 2018). This study uses a sustainability concern variable as a signal of accounting earnings quality as carried out by Kim et al (2018).…”

Pengaruh Akuntansi Akrual dan Pengungkapan Lingkungan terhadap Koefisien Respon Laba pada Perusahaan Terindeks JII

“…Banyak penelitian terdahulu yang telah menguji hubungan antara harga saham dan pengungkapan informasi laba oleh perusahaan. Penelitian tersebut dilakukan untuk melihat apakah informasi laba perusahaan dilaporkan secara jujur dan apakah harga saham mencerminkan informasi tersebut (Al-Baidhani et al, 2017;Amadi & Amadi, 2014;Ball & Brown, 1968;Dechow, 1994;Farooq et al, 2018;Feltham & Pae, 2000;Hasanzade et al, 2013;Homan, 2018;Hosseini et al, 2016;Khaksarian, 2013;Kothari & Sloan, 1992;Kwag & Stephens, 2009;Sunder, 2000). Penelitian tersebut bertujuan yang menguji faktor-faktor yang mempengaruhi koefisien respon laba.…”

“…Penelitian tersebut bertujuan yang menguji faktor-faktor yang mempengaruhi koefisien respon laba. Diantara faktor-faktor tersebut adalah akuntansi akrual (Feltham & Pae, 2000;Khaksarian, 2013;Kwag & Stephens, 2009;Sunder, 2000), kualitas laba, kesempatan pertumbuhan dan profitabilitas, dan risiko sistematis (An, 2015;Hasanzade et al, 2013), pengungkapan lingkungan (Homan, 2018), dan insentif manajemen laba (Hosseini et al, 2016).…”