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http://ssrn.com/abstract=1265320
 
 

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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 Toronto - Rotman School of Management

March 7, 2008


Abstract:     
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

working papers series





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Date posted: September 11, 2008  

Suggested Citation

Tang, Vicki Wei and Li, Kevin K., Earnings Quality and Future Capital Investment: Evidence From Discretionary Accruals* (March 7, 2008). Available at SSRN: http://ssrn.com/abstract=1265320 or http://dx.doi.org/10.2139/ssrn.1265320

Contact Information

Vicki Wei Tang (Contact Author)
Georgetown University - Robert Emmett McDonough School of Business ( email )
3700 O Street, NW
Washington, DC 20057
United States

Kevin K. Li
University of Toronto - Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6
Canada

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