Does Earnings Management Affect Firms' Investment Decisions?

Posted: 22 Jul 2008

Date Written: June 24, 2008


This paper examines whether firms manipulating their reported financial results make suboptimal investment decisions. We examine fixed asset investments for a large sample of public companies during the 1978-2002 period and document that firms that manipulate their earnings - firms investigated by the SEC for accounting irregularities, firms sued by their shareholders for improper accounting, and firms that restated financial statements - over-invest substantially during the misreporting period. Furthermore, following the misreporting period, these firms no longer over-invest, consistent with corrected information leading to more efficient investment levels. We find similar patterns for firms with high discretionary revenues or accruals. Our findings suggest that earnings management, which is largely viewed as targeting parties external to the firm, can also influence internal decisions.

Keywords: earnings management, capital investment

JEL Classification: M41, M43, G31, G38, K22, G34

Suggested Citation

McNichols, Maureen F. and Stubben, Stephen, Does Earnings Management Affect Firms' Investment Decisions? (June 24, 2008). Accounting Review, Forthcoming, Available at SSRN:

Maureen F. McNichols

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-0833 (Phone)

Stephen Stubben (Contact Author)

University of Utah ( email )

1655 E. Campus Center
Salt Lake City, UT 84112
United States

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