IDEAS home Printed from
   My bibliography  Save this paper

Asset returns with earnings management


  • Bo Sun


The paper investigates stock return dynamics in an environment where executives have an incentive to maximize their compensation by artificially inflating earnings. A principal-agent model with financial reporting and managerial effort is embedded in a Lucas asset-pricing model with periodic revelations of the firm's underlying profitability. The return process generated from the model is consistent with a range of financial anomalies observed in the return data: volatility clustering, asymmetric volatility, and increased idiosyncratic volatility. The calibration results further indicate that earnings management by individual firms does not only deliver the observed features in their own stocks, but can also be strong enough to generate market-wide patterns.

Suggested Citation

  • Bo Sun, 2009. "Asset returns with earnings management," International Finance Discussion Papers 988, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:988

    Download full text from publisher

    File URL:
    Download Restriction: no

    File URL:
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    1. John Y. Campbell, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, February.
    2. Campbell, John Y. & Hentschel, Ludger, 1992. "No news is good news *1: An asymmetric model of changing volatility in stock returns," Journal of Financial Economics, Elsevier, vol. 31(3), pages 281-318, June.
    3. Jamsheed Shorish & Stephen E. Spear, 2005. "Shaking the tree: an agency-theoretic model of asset pricing," Annals of Finance, Springer, vol. 1(1), pages 51-72, January.
    4. Kwon, Illoong & Yeo, Eunjung, 2009. "Overstatement and rational market expectation," Economics Letters, Elsevier, vol. 104(1), pages 9-12, July.
    5. Schwert, C.W., 1989. "Margin Requirements And Stock Volatility," Papers t6, Columbia - Center for Futures Markets.
    6. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
    7. Jiang Wang, 1993. "A Model of Intertemporal Asset Prices Under Asymmetric Information," Review of Economic Studies, Oxford University Press, vol. 60(2), pages 249-282.
    8. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    9. Gorton, Gary B. & He, Ping & Huang, Lixin, 2014. "Agency-based asset pricing," Journal of Economic Theory, Elsevier, vol. 149(C), pages 311-349.
    10. Pok-sang Lam & Stephen G. Cecchetti & Nelson C. Mark, 2000. "Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True?," American Economic Review, American Economic Association, vol. 90(4), pages 787-805, September.
    11. Hamao, Yasushi & Masulis, Ronald W & Ng, Victor, 1990. "Correlations in Price Changes and Volatility across International Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 281-307.
    12. Christie, Andrew A., 1982. "The stochastic behavior of common stock variances : Value, leverage and interest rate effects," Journal of Financial Economics, Elsevier, vol. 10(4), pages 407-432, December.
    13. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    14. Anil Arya & Shyam Sunder & Jonathan Glover, 2002. "Are Unmanaged Earnings Always Better for Shareholders?," Yale School of Management Working Papers ysm295, Yale School of Management, revised 01 Feb 2003.
    15. Lacker, Jeffrey M. & Levy, Robert J. & Weinberg, John A., 1990. "Incentive compatible financial contracts, asset prices, and the value of control," Journal of Financial Intermediation, Elsevier, vol. 1(1), pages 31-56, March.
    16. Benoit Mandelbrot, 2015. "The Variation of Certain Speculative Prices," World Scientific Book Chapters,in: THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 3, pages 39-78 World Scientific Publishing Co. Pte. Ltd..
    17. Detemple, Jerome B, 1986. " Asset Pricing in a Production Economy with Incomplete Information," Journal of Finance, American Finance Association, vol. 41(2), pages 383-391, June.
    18. Jonathan C. Glover & Anil Arya & Shyam NMI Sunder, 1999. "Earnings Management and the Revelation Principle," Yale School of Management Working Papers ysm120, Yale School of Management.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Stocks - Rate of return;


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedgif:988. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Franz Osorio). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.