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Does Investors' Sophistication Affect Persistence and Pricing of Discretionary Accruals?

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  • Lanfeng Kao

    (Department of Finance, National University of Kaohsiung, No. 700, Kaohsiung University Road, Nan-Tzu District, Kaohsiung 811, Taiwan, R.O.C.)

Abstract

This paper examines whether the sophistication of market investors influences management's strategy on discretionary accounting choice, and thus changes the persistence of discretionary accruals. The results show that the persistence of discretionary accruals for firms face with naive investors is lower than that for firms face with sophisticated investors. The results also demonstrate that sophisticated investors indeed incorporate the implications of current earnings components into future earnings in a more sufficient manner than naïve investors do.

Suggested Citation

  • Lanfeng Kao, 2007. "Does Investors' Sophistication Affect Persistence and Pricing of Discretionary Accruals?," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 10(01), pages 33-50.
    • Handle: RePEc:wsi:rpbfmp:v:10:y:2007:i:01:n:s0219091507000945
    DOI: 10.1142/S0219091507000945
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    References listed on IDEAS

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    1. Frederic S. Mishkin, 1983. "A Rational Expectations Approach to Macroeconometrics: Testing Policy Ineffectiveness and Efficient-Markets Models," NBER Books, National Bureau of Economic Research, Inc, number mish83-1, March.
    2. Frederic S. Mishkin, 1983. "Introduction to "A Rational Expectations Approach to Macroeconometrics: Testing Policy Ineffectiveness and Efficient-Markets Models"," NBER Chapters, in: A Rational Expectations Approach to Macroeconometrics: Testing Policy Ineffectiveness and Efficient-Markets Models, pages 1-6, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Haziza, Mor M. & Kalay, Avner, 2020. "Trust and delegation: A case to consider on broker rebates and investor sophistication," Journal of Financial Markets, Elsevier, vol. 49(C).

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    More about this item

    Keywords

    Managerial discretion; discretionary accruals; investors' sophistication;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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