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Effects of Earnings Management Strategy on Earnings Predictability: A Quantile Regression Approach Based on Opportunistic Versus Efficient Earnings Management

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This study argues that the managerial choice of earnings management strategy may be contingent upon a firm’s information asymmetry and such a strategy affects the firm’s earnings predictability. Measuring information asymmetry by earnings predictability based on the subsequent dispersion in analysts’ forecasts and employing a quantile regression to analyze 28,383 U.S. firm-year observations obtained from 1988 to 2014, this study reports that the effect of earnings management strategy on earnings predictability is non-uniform. Specifically, the amount of absolute discretionary accruals negatively (positively) relate to the subsequent dispersion in analysts’ forecasts in the low (high) quantiles of the latter. These results support our hypothesis that a firm may implement efficient or opportunistic earnings management strategies according to the degree of information asymmetry between the firm’s management and corporate outsiders.

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  • Leon Li & Nen-Chen Richard Hwang & Gilbert V. Nartea, 2019. "Effects of Earnings Management Strategy on Earnings Predictability: A Quantile Regression Approach Based on Opportunistic Versus Efficient Earnings Management," Working Papers in Economics 19/09, University of Canterbury, Department of Economics and Finance.
    • Handle: RePEc:cbt:econwp:19/09
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    Keywords

    Discretionary accruals; analysts’ forecasts dispersion; quantile regression;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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