José António Moreira () (CETE, Faculdade de Economia, Universidade do Porto)
Abstract
In this paper I analyze the interaction between firms’ earnings management behavior and conservatism. I predict that firms having conservatism-related bad news in the period have more pervasive earnings management than firms having good news. Departing from Burgstahler and Dichev (1997) methodology to detect earnings management, and taking the sign of market returns as a proxy for conservatism effects, I find empirical evidence that supports the prediction of an interaction between firms’ earnings management behavior and conservatism. The evidence is thus consistent with the discontinuities around zero in the earnings distributions being driven, at least partly, by firms’ earnings management behavior, and is robust to controlling for other effects mentioned in the literature as potential determinants of such discontinuities.
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Publisher Info
Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series CETE Discussion Papers with number
0605.
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