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Real earnings management and stock returns: moderating role of cross-sectional effects

AJAR (Asian Journal of Accounting Research) (Online), 2021-09, Vol.6 (3), p.266-280 [Peer Reviewed Journal]

Manish Bansal, Asgar Ali and Bhawna Choudhary ;Manish Bansal, Asgar Ali and Bhawna Choudhary. This work is published under https://creativecommons.org/licenses/by-nc/3.0/legalcode (the “License”). Notwithstanding the ProQuest Terms and Conditions, you may use this content in accordance with the terms of the License. ;ISSN: 2443-4175 ;EISSN: 2443-4175 ;DOI: 10.1108/AJAR-11-2020-0107

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  • Title:
    Real earnings management and stock returns: moderating role of cross-sectional effects
  • Author: Bansal, Manish ; Ali, Asgar ; Choudhary, Bhawna
  • Subjects: Accounting ; Algorithms ; Asymmetry ; downward real earnings management ; Earnings ; Earnings management ; Efficient markets ; Emerging markets ; Equity ; Growth stocks ; Hypotheses ; indian stock market ; Influence ; Investments ; market efficiency ; real earnings management ; Securities markets ; Stock exchanges ; Stock prices ; stock returns ; upward real earnings management
  • Is Part Of: AJAR (Asian Journal of Accounting Research) (Online), 2021-09, Vol.6 (3), p.266-280
  • Description: PurposeThe study aims at investigating the impact of real earnings management (REM) on the cross-sectional stock return after considering the moderating role of market effect, size effect, value effect and momentum effect.Design/methodology/approachThe study uses weekly and monthly data of 3,085 Bombay Stock Exchange listed stocks spanning over twenty years, from January 2000 to December 2019. REM is measured through metrics developed by Roychowdhury (2006), namely, abnormal levels of operating cash flows, production costs and discretionary expenditure. The study employs univariate and bivariate portfolio-level analysis.FindingsThe findings deduced from the empirical results demonstrate that investors perceive downward REM as an element of risk; hence, they discount the stock prices at a higher rate. On the contrary, results show that investors positively perceive upward REM; hence, they hold the stocks even at a lower rate of return. This anomaly is found to be robust for all kinds of considered moderations.Practical implicationsThe findings have important managerial implications as investors are found to assign different weights to different forms of REM, depending upon the perception regarding the magnitude of risk involved in different forms. Managers can accommodate this information during their short- and long-term corporate planning.Originality/valueFirst, the study is among the earlier attempts to examine the association between REM and stock returns by considering the moderating role of cross-sectional effects. Second, the study considers the direction and endogenous nature of REM while investigating the issue.
  • Publisher: Bingley: Emerald Publishing Limited
  • Language: English
  • Identifier: ISSN: 2443-4175
    EISSN: 2443-4175
    DOI: 10.1108/AJAR-11-2020-0107
  • Source: ProQuest Central
    DOAJ Directory of Open Access Journals
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