Does Earnings Management Predict Stock Returns?
Date Issued
2014
Date
2014
Author(s)
Mo, Chiao-Min
Abstract
This paper examines the stock return predictability of both accrual-based earnings management and real earnings management. We collect whole U.S. listed companies during 1987 to 2012, and consider two measures to capture accrual-based earnings management and three measures to capture real earnings management. Then we conduct Fama and MacBeth (1973) regressions to test the stock return predictability of the five measures. Finally, we examine if the return predictive power differs in the pre- and post- Sarbanes Oxley Act periods
Our empirical results suggest both accrual-based and real earnings management predict stock returns during 1987 to 2001. Firm-years with stronger tendency engaging in earnings management experience significantly lower future stock returns. However, the stock return predictability associated with earnings management disappears after 2002, which is probably because after Sarbanes-Oxley Act, financial reports become more transparent, and investors also pay more attention to earnings management and price stocks more rationally.
We make three contributions to the literature. First, we complement existing literature by documenting the stock return predictability of real earnings management in the whole U.S. listed companies. Second, we find both the stock return predictability of accrual-based earnings management and real earnings management disappear after Sarbanes-Oxley Act. Third, we show that reducing discretionary expenses does not pose significantly negative influence on firms’ stock returns.
Subjects
應計盈餘操弄
實質盈餘操弄
股價報酬預測能力
Type
thesis
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