Do Managers Credibly Use Accruals to Signal Private Information? Evidence from the Pricing of Discretionary Accruals Around Stock Splits
36 Pages Posted: 11 Nov 2003
There are 2 versions of this paper
Do Managers Credibly Use Accruals to Signal Private Information? Evidence from the Pricing of Discretionary Accruals Around Stock Splits
Date Written: August 8, 2003
Abstract
Prior studies suggest that managers use their reporting discretion to signal their private information. Because of the litigation risk associated with inflating earnings, we conjecture that managers are more likely to use their reporting discretion to signal favorable private information when they are very confident that future performance will meet the expectations raised by their reports. In addition, because managers are often assumed to use their discretion to mislead investors, we also conjecture that, without a second corroborating signal, discretionary reporting is likely to be regarded as opportunistic. The extant literature strongly suggests that managers split their stock when they are optimistic about their firms' future prospect. However, existing studies also suggest that a stock split is only partially effective as a signal. Hence, we posit that, if managers use their reporting discretion to signal favorable private information, they are likely to do so in conjunction with stock splits. The reporting signal reinforces the stock split signal whereas the stock split signal lends credibility to the reporting signal. Consistent with our conjectures, we find strong evidence indicating that managers use accruals in conjunction with stock splits to signal good performance. The evidence also suggests that the signal is deemed credible by the market.
Note: Previously titled "The Use of Accruals as a Signaling Device: An Analysis of Earnings Re-Pricing around Stock Splits"
Keywords: Stock split, earnings management, signaling, market efficiency, income smoothing
JEL Classification: M41, M43, G14
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Detecting Earnings Management: A New Approach
By Patricia Dechow, Amy P. Hutton, ...
-
A Review of the Earnings Management Literature and its Implications for Standard Setting
-
Errors in Estimating Accruals: Implications for Empirical Research
By Daniel W. Collins and Paul Hribar
-
The Economic Implications of Corporate Financial Reporting
By John R. Graham, Campbell R. Harvey, ...
-
The Economic Implications of Corporate Financial Reporting
By John R. Graham, Campbell R. Harvey, ...
-
On the Association between Voluntary Disclosure and Earnings Management
By Ron Kasznik
-
Performance Matched Discretionary Accrual Measures
By S.p. Kothari, Andrew J. Leone, ...
-
The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors
By Ilia D. Dichev and Patricia Dechow