Can Managers Use Discretionary Accruals to Ease Financial Constraints? Evidence from Discretionary Accruals Prior to Investment

52 Pages Posted: 22 Mar 2010 Last revised: 20 Oct 2015

See all articles by James S. Linck

James S. Linck

Southern Methodist University (SMU) - Finance Department

Jeffry M. Netter

Department of Finance; University of Georgia Law School

Tao Shu

The Chinese University of Hong Kong, Shenzhen; Shenzhen Finance Institute

Date Written: February 27, 2013

Abstract

Despite a large literature on discretionary accruals, how the use of discretionary accruals impacts corporate financial decisions is not well understood. We hypothesize that a financially constrained firm with valuable projects can use discretionary accruals to credibly signal positive prospects, enabling it to raise capital to make the investments. We examine a large panel of firms during 1987 to 2009 and find that financially constrained firms with good investment opportunities have significantly higher discretionary accruals prior to investment compared to their unconstrained counterparts. Constrained high-accrual firms have higher earnings-announcement returns than constrained low-accrual firms, obtain more equity and debt financing, and invest in projects that appear to improve performance. These results provide supporting evidence that the use of discretionary accruals can help constrained firms with valuable projects ease those constraints and increase firm value.

Keywords: Financial constraints, discretionary accruals, investment, signaling, valuation, external financing

JEL Classification: G31

Suggested Citation

Linck, James S. and Netter, Jeffry M. and Shu, Tao, Can Managers Use Discretionary Accruals to Ease Financial Constraints? Evidence from Discretionary Accruals Prior to Investment (February 27, 2013). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1573147 or http://dx.doi.org/10.2139/ssrn.1573147

James S. Linck

Southern Methodist University (SMU) - Finance Department ( email )

United States

Jeffry M. Netter

Department of Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States
706-542-4450 (Phone)

HOME PAGE: http://www.terry.uga.edu/directory/profile/jnetter/

University of Georgia Law School

225 Herty Drive
Athens, GA 30602
United States

Tao Shu (Contact Author)

The Chinese University of Hong Kong, Shenzhen ( email )

Shenzhen Finance Institute ( email )

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