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Does Investor Sentiment Affect Earnings Management?

Journal of business finance & accounting, 2013-09, Vol.40 (7-8), p.869-900 [Peer Reviewed Journal]

2013 John Wiley & Sons Ltd ;Copyright Blackwell Publishing Ltd. Sep/Oct 2013 ;ISSN: 0306-686X ;EISSN: 1468-5957 ;DOI: 10.1111/jbfa.12038

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  • Title:
    Does Investor Sentiment Affect Earnings Management?
  • Author: Simpson, Ana
  • Subjects: Accruals ; Attitudes ; discretionary accruals ; Earnings ; Earnings management ; Economic development ; Financial management ; Gross domestic product ; Industrial production ; Inflation ; investor sentiment ; Investors ; Macroeconomics ; Profitability ; Profits ; Stock returns ; Studies
  • Is Part Of: Journal of business finance & accounting, 2013-09, Vol.40 (7-8), p.869-900
  • Description: I hypothesize and find that earnings management via accruals is driven partially by the prevailing market‐wide investor sentiment. Managers inflate earnings in periods of higher sentiment, but report more conservatively during periods of low sentiment. Moreover, the likelihood of income‐increasing earnings management to avoid negative earnings surprises is also positively associated with investor sentiment. These results are robust to: (i) controls for time‐varying firm characteristics such as growth, investment opportunity sets, future profitability, leverage and size; (ii) macroeconomic variables such as future inflation, GDP growth, and growth in industrial production; (iii) multiple proxies for investor sentiment; and (iv) discretionary revenues as alternative measure of earnings management. Cross‐sectional analyses reveal that firms whose stock returns co‐move more with investor sentiment are more (less) likely to manage earnings upward via abnormal accruals in quarters of higher (lower) sentiment. The findings of managers’ strategic use of abnormal accruals show the need for increased attention from boards of directors, auditors and regulators to heightened managerial incentives to overstate earnings and to report optimistic earnings numbers during periods of high investor sentiment.
  • Publisher: Oxford: Blackwell Publishing Ltd
  • Language: English
  • Identifier: ISSN: 0306-686X
    EISSN: 1468-5957
    DOI: 10.1111/jbfa.12038
  • Source: Alma/SFX Local Collection
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