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Market Rewards to Patterns of Increasing Earnings: Do Cash Flow Patterns, Accruals Manipulation and Real Activities Manipulation Matter?

Author

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  • Su-Ping Liu

    (Universidad Carlos III de Madrid)

  • Juan Manuel García Lara

    (Universidad Carlos III de Madrid)

Abstract

This study explores whether firms have differential price-earnings multiples associated with their means of achieving a sequential pattern of increasing positive earnings. Our main findings show that market participan ts assign higher price-earnings multiples to firms when their pattern of increasing earnings is supported by the same pattern of increasing cash flows. Market participants assign lower price-earnings multiples to firms suspect of having engaged in accrual-based earnings management, sales manipulation, and overproduction to achieve the earnings pattern. We find, however, that market participants do not penalize firms suspect of having achieved the earnings pattern through the opportunistic reduction of disc retionary expenses.

Suggested Citation

  • Su-Ping Liu & Juan Manuel García Lara, 2013. "Market Rewards to Patterns of Increasing Earnings: Do Cash Flow Patterns, Accruals Manipulation and Real Activities Manipulation Matter?," Working Papers 1303, Departament Empresa, Universitat Autònoma de Barcelona, revised May 2013.
    • Handle: RePEc:bbe:wpaper:1303
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    File URL: http://www.uab.cat/doc/DOC_WP_13_03
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    References listed on IDEAS

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