The Impact of Earnings Management on Stock Returns When Firms Incur Bad News
Date Issued
2010
Date
2010
Author(s)
Chen, Li-Wen
Abstract
The purpose of this study is to examine the economic consequence of earnings management for bad news. By examining both the relation between earnings management and idiosyncratic risk, and the relation between earnings management and crash risk, this study is able to infer the possible intention of earnings management for bad news. Idiosyncratic risk is a proxy for how and to what extent firm-specific information is impounded into stock returns, and this study use negative conditional return skewness as a measure of crash risk. This study assumes there is bad news behind dividend reduction. As such, the data covers the four firm-year period before and after the year of dividend reduction. To proxy for earnings management, this study uses the modified Jones model discretionary accruals.
Empirical evidence shows that earnings management is significantly associated with low idiosyncratic risk, and earnings management is associated with high negative conditional return skewness. Although the relation between earnings management and negative conditional return skewness is not highly significant, the positive relation is consistent with the prediction. These results are consistent with the prediction of Jin and Myers (2006), implying managers manage earnings upward to hide bad news. Moreover, these relations seem to dissipate after the year of dividend reduction, suggesting that managers are less likely to manage earnings upward to hide bad news after the year of dividend reduction.
Subjects
Idiosyncratic risk
Price synchronicity
Negative conditional return skewness
Stock price crash risk
Dividend reduction
Earnings management
Type
thesis
File(s)![Thumbnail Image]()
Loading...
Name
ntu-99-R97722011-1.pdf
Size
23.32 KB
Format
Adobe PDF
Checksum
(MD5):e78172be0b37fd35c5146333d9641fbc