Does the Market Price the Nature and Extent of Earnings Management for Firms that Beat Their Earnings Benchmark?

Posted: 5 Nov 2016

See all articles by Camillo Lento

Camillo Lento

Lakehead University

Julie Cotter

University of Southern Queensland

Irene Tutticci

University of Queensland - Business School

Date Written: November 1, 2016

Abstract

This study investigates whether the abnormal returns at the quarterly earnings announcement date varies according to the market’s expectations of the nature (informative vs opportunistic) and extent of discretionary accruals for firms that meet or beat expectations (MBE). In doing so, this study introduces an innovative model that measures the market’s expectation of the informativeness of earnings at the earnings announcement date and assesses the impact on the abnormal return for the interaction between the nature and expected extent of earnings management. A large sample of Standard & Poor’s (S&P) 500 firms that meet or exceed their earnings expectation over the period of 1998 to 2007 is analyzed. The results reveal that the expected extent of earnings management has a positive (negative) relation with the abnormal return when earnings management is informative (opportunistic).

Keywords: earnings management, market pricing of discretionary accruals, meeting or beating expectations

Suggested Citation

Lento, Camillo and Cotter, Julie and Tutticci, Irene, Does the Market Price the Nature and Extent of Earnings Management for Firms that Beat Their Earnings Benchmark? (November 1, 2016). Australian Journal of Management, Vol. 41, No. 4, 2016, Available at SSRN: https://ssrn.com/abstract=2864515

Camillo Lento (Contact Author)

Lakehead University ( email )

955 Oliver Road
Thunder Bay, Ontario P7B 5E1
Canada

Julie Cotter

University of Southern Queensland ( email )

Australian Centre for Sustainable Business and Dev
Toowoomba, 4350
Australia
+61 7 4631 2916 (Phone)
+61 7 4631 1770 (Fax)

HOME PAGE: http://www.usq.edu.au/users/cotter/

Irene Tutticci

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia
+617-3365-6587 (Phone)
+617-3365-6788 (Fax)

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