Abstract

http://ssrn.com/abstract=991138
 
 

References (69)



 
 

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A Catering Theory of Earnings Management


Shivaram Rajgopal


Emory University - Goizueta Business School

Lakshmanan Shivakumar


London Business School

Ana Vidolovska Simpson


London School of Economics & Political Science - Department of Accounting

October 24, 2007


Abstract:     
We propose that earnings management is driven by the prevailing investor demand for earnings surprises. Managers cater to investors by inflating earnings in periods when investors react optimistically to positive earnings surprises relative to negative earnings surprises and report more conservatively when investors react pessimistically to earnings news. Using aggregate market-level data, we find that the propensity to use income-increasing abnormal accruals is higher (lower) in quarters when proxies for investors' response to positive earnings surprises relative to negative earnings surprises is higher (lower). Further analysis suggests that investor sentiment might at least partly account for the relation between abnormal accruals and investors' earnings optimism.

Number of Pages in PDF File: 58

Keywords: earnings management, sentiment, earnings optimism, aggregate-level earnings, abnormal accruals

JEL Classification: M41, M43, G12

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Date posted: June 5, 2007 ; Last revised: October 26, 2007

Suggested Citation

Rajgopal, Shivaram and Shivakumar, Lakshmanan and Simpson, Ana Vidolovska, A Catering Theory of Earnings Management (October 24, 2007). Available at SSRN: http://ssrn.com/abstract=991138 or http://dx.doi.org/10.2139/ssrn.991138

Contact Information

Shivaram Rajgopal (Contact Author)
Emory University - Goizueta Business School ( email )
1300 Clifton Road
Atlanta, GA 30322-2722
United States
Lakshmanan Shivakumar
London Business School ( email )
Regent's Park
London, NW1 4SA
United Kingdom
+44 20 7000 8115 (Phone)
+44 20 7000 8101 (Fax)
HOME PAGE: http://faculty.london.edu/lshivakumar/
Ana Simpson
London School of Economics & Political Science - Department of Accounting ( email )
United Kingdom
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