Informative and Opportunistic Earnings Management and the Value Relevance of Earnings: Some Evidence on the Role of Ios

Abstract

In this paper, we first recognize that managers manage earnings for either informational purposes or for opportunistic purposes. We then explore whether a firm's growth opportunities, as measured by its investment opportunity set (IOS), an exogenous variable, is associated with this choice. In particular, this study examines whether IOS affects managers' choice to report opportunistically to hide performance or to report more informative earnings. Our results show that discretionary accruals improve the value relevance of earnings measured in terms of the earnings-return relationship (ERR) in firms with higher IOS. This is consistent with the notion of a higher proportion of informative earnings management (IEM) in high-IOS firms.

Keywords: capital markets, valuation, opportunistic and informative earnings management, discretionary accruals, investment opportunity set

JEL Classification: G12, G32, G39, M41, M43