Does the market price the nature and extent of earnings management for firms that beat their earnings benchmark?

Article

Lento, Camillo, Cotter, Julie and Tutticci, Irene. 2016. "Does the market price the nature and extent of earnings management for firms that beat their earnings benchmark?" Australian Journal of Management. 41 (4), pp. 633-655. https://doi.org/10.1177/0312896216641600
Article Title

Does the market price the nature and extent of earnings
management for firms that beat their earnings benchmark?

ERA Journal ID19154
Article CategoryArticle
AuthorsLento, Camillo (Author), Cotter, Julie (Author) and Tutticci, Irene (Author)
Journal TitleAustralian Journal of Management
Journal Citation41 (4), pp. 633-655
Number of Pages23
Year2016
Place of PublicationAustralia
ISSN0312-8962
1327-2020
Digital Object Identifier (DOI)https://doi.org/10.1177/0312896216641600
Web Address (URL)http://journals.sagepub.com/doi/full/10.1177/0312896216641600
Abstract

This study investigates whether the abnormal returns at the quarterly earnings announcement date varies according to the market’s expectations of the nature (informative vs opportunistic) and extent of discretionary accruals for firms that meet or beat expectations (MBE). In doing so, this study introduces an innovative model that measures the market’s expectation of the informativeness of earnings at the earnings announcement date and assesses the impact on the abnormal return for the interaction between the nature and expected extent of earnings management. A large sample of Standard & Poor’s (S&P) 500 firms that meet or exceed their earnings expectation over the period of 1998 to 2007 is analyzed. The results reveal that the expected extent of earnings management has a positive (negative) relation with the abnormal return when earnings management is informative (opportunistic).

Keywordsearnings management, market pricing of discretionary accruals, meeting or beating expectations
ANZSRC Field of Research 2020350103. Financial accounting
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Byline AffiliationsLakehead University, Canada
Faculty of Business
University of Queensland
Institution of OriginUniversity of Southern Queensland
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