The Market's Valuation of Fraudulently Reported Earnings

25 Pages Posted: 26 Jul 2014

See all articles by Kai Wai Hui

Kai Wai Hui

The University of Hong Kong (HKU) - Department of Accounting

Clive S. Lennox

University of Southern California

Guochang Zhang

University of Hong Kong

Date Written: June/July 2014

Abstract

This study examines the market valuation of accounting earnings during the period before it is publicly revealed that the earnings are fraudulent. Using both cross‐sectional and time‐series valuation models, we first find that the market accords less weight to earnings when the accounting numbers are fraudulent. We also show that the market better anticipates the presence of fraud when there is information in the public domain indicating a high ex‐ante risk of fraud. Our findings suggest that investors are able to accurately assess the probability of fraud and that such assessments affect the market's valuation of earnings even before it is publicly announced that fraud has occurred.

Keywords: accounting fraud, market valuation, earnings coefficient

Suggested Citation

Hui, Kai Wai and Lennox, Clive and Zhang, Guochang, The Market's Valuation of Fraudulently Reported Earnings (June/July 2014). Journal of Business Finance & Accounting, Vol. 41, Issue 5-6, pp. 627-651, 2014. Available at SSRN: https://ssrn.com/abstract=2472219 or http://dx.doi.org/10.1111/jbfa.12072

Kai Wai Hui (Contact Author)

The University of Hong Kong (HKU) - Department of Accounting ( email )

Pokfulam Road
Hong Kong, Pokfulam
Hong Kong

Clive Lennox

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Guochang Zhang

University of Hong Kong ( email )

KK Leung Building
Faculty of Business and Economics
Hong Kong
+852 3917 1076 (Phone)

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