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Industry Valuation Driven Earnings Management

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Author Info
Jiao, T.
Mertens, G.M.H.
Roosenboom, P.G.J. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
Abstract

This paper investigates whether industry valuation impacts firms’ earnings management decisions. Existing accounting literature assumes that industry valuation has a constant impact on this decision. We argue that a higher industry valuation increases the perceived benefits of earnings management at a time when the negative consequences associated with accrual reversal and the probability of detection are believed to be lower. Using a sample of quarterly data of U.S. firms from 1985 to 2005, we find that the four-quarter lagged industry valuation has a positive relationship with industry aggregate (current) discretionary accruals. More specific, one standard deviation increase in the aggregate industry valuation is associated with a significant increase of 2.4 cents in quarterly earnings per share. Our results are robust after controlling for several factors, including bubble years, size, leverage and performance.

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Publisher Info
Paper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam. in its series Research Paper with number ERS-2007-069-F&A Revision_Date: 2009-07-29.

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Date of creation: 25 Oct 2007
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Handle: RePEc:dgr:eureri:300011914

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Related research
Keywords: Industry valuation; Earnings management; Market to book ratio;

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