The Effect of Overvaluation on Investment and Accruals: The Role of Information
66 Pages Posted: 8 Aug 2016
Date Written: June 3, 2016
This paper examines whether the effect of overvaluation on accrual and investment is weak in a good information environment using the naive manager hypothesis and the monitoring hypothesis. The results show that CEOs recognize overvaluation and reduce their shareholdings regardless of the extent of the information environment and the naive manager hypothesis is not supported. However, managers in a good information environment do not respond to overvaluation with accrual or investment, and more institutional investors help to reduce overvaluation-driven behaviors. Thus, the monitoring hypothesis is supported. These findings are free from causality concerns and robust for alternative measures of misvaluation.
Keywords: Accrual, Earnings management, Capital investment, Misvaluation, Information, Governance
JEL Classification: G10, G34, M40, M52
Suggested Citation: Suggested Citation