Investment Opportunity Set, Accounting Policy, and Discretionary Accruals

Posted: 17 Feb 2011 Last revised: 28 May 2013

See all articles by Hasna Chaibi

Hasna Chaibi

University of Tunis - Institut Supérieur de Gestion (ISG), Tunis

Abdelwahed Omri

University of Tunis - Department of Statistics

Samir Trabelsi

Brock University - Accounting

Date Written: November 30, 2010

Abstract

This study analyzes the effect of the investment opportunity set (IOS) on management's use of discretionary accruals to increase or decrease income. We argue that the relation between the IOS and the managerial decision to select accounting methods to maximize or minimize reported results is based upon the level of firm information asymmetry. First, given the information asymmetry, managers engage in income-increasing earnings management to signal firm performance or to achieve personal gains. Second, given their greater information asymmetry, firms with high investment opportunity set are more likely to select income-increasing accounting procedure. Third, we argue that discretionary accruals are a global measure of corporate accounting choices. The results of this paper show that firms with more investment opportunities are more likely to use discretionary accruals to maximize reported earnings. These results are robust to various discretionary accruals models and other sensitivity tests.

Keywords: Investment opportunity set, discretionary accruals, Information asymmetry

JEL Classification: M41

Suggested Citation

Chaibi, Hasna and Omri, Abdelwahed and Trabelsi, Samir, Investment Opportunity Set, Accounting Policy, and Discretionary Accruals (November 30, 2010). Available at SSRN: https://ssrn.com/abstract=1762816 or http://dx.doi.org/10.2139/ssrn.1762816

Hasna Chaibi

University of Tunis - Institut Supérieur de Gestion (ISG), Tunis ( email )

45 Rue de la Liberte, Cite Bouchoucha
Bardo, Tunis 2000
Tunisia

Abdelwahed Omri

University of Tunis - Department of Statistics ( email )

Bardo, 2000
Tunisia

Samir Trabelsi (Contact Author)

Brock University - Accounting ( email )

St. Catharines, Ontario L2S 3A1
Canada

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