Market Reaction to Earnings Management: Evidence from the Johannesburg Securities Exchange (JSE)

Abstract

The examination of the stock market's ability to detect earnings managing firms and the speed at which it identifies profit manipulation are extremely important matters. The pricing effects of earnings management has not be adequately studied, hence this study aimed at examining the pricing effects of earnings management in an emerging market environment. The paper applied a version of the Gavios (2007) model, and compared panel data regression parameters. Our findings are (i) that the JSE appears to price earnings managing firms differently; (ii) earnings management indicators, such as deferred taxes and discretionary accruals are positively but insignificantly associated with equity prices, and (iii) with regard to the speed of adjustment, the JSE appears to note the existence of discretionary accruals 150 days after the share price date (30 days after the normal submission time of financial statements).

Keywords: Earnings management, discretionary accruals, market reaction, Johannesburg Securities Exchange

JEL Classification: G30, G32, G12, M41, M43