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Earning Investor Trust: The Role of Past Earnings Management

Author

Listed:
  • Florian Eugster

    (Stockholm School of Economics)

  • Alexander F. Wagner

    (University of Zurich, Swiss Finance Institute, Centre for Economic Policy Research (CEPR), and European Corporate Governance Institute (ECGI))

Abstract

HDoes earnings management, even though legal, hamper investor trust in reported earnings? Or do investors regard earnings management as a way for firms to convey private information, or simply as a neutral feature of financial reporting? We find that past abstinence from earnings management increases investor responses to future earnings surprises. Importantly, this effect occurs where managers would in the past have had strong incentives and ample opportunities to misrepresent earnings. Overall, investors seem to interpret the extent to which management resists temptations for misreporting as a “litmus test” of trustworthiness.

Suggested Citation

  • Florian Eugster & Alexander F. Wagner, 2017. "Earning Investor Trust: The Role of Past Earnings Management," Swiss Finance Institute Research Paper Series 17-31, Swiss Finance Institute, revised Mar 2018.
    • Handle: RePEc:chf:rpseri:rp1731
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    More about this item

    Keywords

    Earnings management; earnings response; credibility; trust;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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