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

Author

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  • Camillo Lento

    (Faculty of Business Administration, Lakehead University, Thunder Bay, ON, Canada)

  • Julie Cotter

    (University of Southern Queensland, Toowoomba, QLD, Australia)

  • Irene Tutticci

    (University of Queensland, Brisbane, QLD, Australia)

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).

Suggested Citation

  • Camillo Lento & Julie Cotter & Irene Tutticci, 2016. "Does the market price the nature and extent of earnings management for firms that beat their earnings benchmark?," Australian Journal of Management, Australian School of Business, vol. 41(4), pages 633-655, November.
    • Handle: RePEc:sae:ausman:v:41:y:2016:i:4:p:633-655
    DOI: 10.1177/0312896216641600
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    References listed on IDEAS

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    More about this item

    Keywords

    Earnings management; market pricing of discretionary accruals; meeting or beating expectations;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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