Earnings Quality and Future Capital Investment: Evidence From Discretionary Accruals*
Vicki Wei Tang
Georgetown University - Robert Emmett McDonough School of Business
Kevin K. Li
University of California, Riverside (UCR) - UCR School of Business Administration (SoBA)
March 7, 2008
This paper examines how one aspect of earnings quality - discretionary accruals - affects subsequent capital investment pattern and efficiency. We find that, conditional on investment opportunities, investment in fixed assets in period t is less sensitive to internal cash flows for firms with large positive discretionary accruals in period t-1. We also find that, at a given level of capital investment in fixed assets in period t, the return on assets in period t +1 is lower for firms with large positive discretionary accruals in period t-1. The overall evidence suggests that firms with large positive discretionary accruals mis-allocate resources, and thus, impose dead-weight efficiency loss.
Number of Pages in PDF File: 42
Keywords: earnings quality, discretionary accruals, capital investment, investment
JEL Classification: G31, M41, M43
Date posted: September 11, 2008
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