Managerial Discretion in Accruals and Informational Efficiency

Journal of Business, Finance & Accounting (JBFA), Forthcoming

66 Pages Posted: 24 Oct 2012 Last revised: 21 Mar 2017

See all articles by Pietro Perotti

Pietro Perotti

University of Bath - School of Management

David Windisch

University of Amsterdam

Multiple version iconThere are 2 versions of this paper

Date Written: February 10, 2017

Abstract

In this paper we examine the relation between managerial discretion in accruals and informational efficiency. We measure managerial discretion in accruals by the absolute value of discretionary accruals. Assuming that efficient prices follow a random walk, we measure informational efficiency by using stock return variance ratios. We find that the absolute value of discretionary accruals is negatively associated with the price deviation from a random walk pattern, estimated in the 12-month period subsequent to the accrual reporting; hence, future informational efficiency increases with the extent to which managers exercise discretion over accruals. The results are consistent with the view that discretionary accruals, on average, convey useful information to investors and facilitate the price convergence to its fundamental value. Our findings are robust to a battery of tests, which we run to validate both our measures of informational efficiency and our measure of managerial discretion in accruals.

Keywords: Managerial discretion, Discretionary accruals, Informational efficiency, Stock return variance ratios

JEL Classification: M41, G14

Suggested Citation

Perotti, Pietro and Windisch, David, Managerial Discretion in Accruals and Informational Efficiency (February 10, 2017). Journal of Business, Finance & Accounting (JBFA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2166454 or http://dx.doi.org/10.2139/ssrn.2166454

Pietro Perotti (Contact Author)

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

HOME PAGE: http://www.bath.ac.uk/management/faculty/pietro-perotti.html

David Windisch

University of Amsterdam ( email )

Amsterdam Business School
Plantage Muidergracht 12
Amsterdam, 1018 TV
Netherlands

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