Real Earnings Management and Information Asymmetry in the Equity Market

European Accounting Review, (Forthcoming)

43 Pages Posted: 15 Nov 2016

See all articles by David Abad

David Abad

Universidad de Alicante

M. Fuensanta Cutillas-Gomariz

University of Murcia

Juan P. Sánchez-Ballesta

University of Murcia

José Yagüe

University of Murcia

Date Written: October 31, 2016

Abstract

The literature suggests that real earnings management (REM) activities can increase adverse selection-risk in capital markets. Due to their opacity and the difficulties in understanding their implications, REM strategies may increase the level of information asymmetry among investors. This paper examines the association between earnings management through real activities manipulation and information asymmetry in the equity market. To estimate the level of adverse selection risk we use a comprehensive index of information asymmetry measures proposed by the market microstructure literature. For a sample of Spanish listed firms, we find that firms’ strategies of increasing earnings through REM are associated with higher information asymmetry in those firms that meet last year’s earnings. Our findings are consistent with the hypothesis that earnings management through real activities manipulation garbles the market, enhances private information production, and exacerbates information asymmetry in the stock market.

Keywords: Information Asymmetry, Real Earnings Management, Real Activities Manipulation, Discretionary Accruals.

JEL Classification: G14, M41, M48

Suggested Citation

Abad, David and Cutillas-Gomariz, M. Fuensanta and Sánchez-Ballesta, Juan P. and Yagüe, José, Real Earnings Management and Information Asymmetry in the Equity Market (October 31, 2016). European Accounting Review, (Forthcoming), Available at SSRN: https://ssrn.com/abstract=2868626

David Abad

Universidad de Alicante ( email )

Campus de San Vicente
Carretera San Vicente del Raspeig
San Vicente del Raspeig, 03690
Spain

M. Fuensanta Cutillas-Gomariz

University of Murcia ( email )

Avda Teniente Flomesta, 5
Murcia, Murcia 30100
Spain

Juan P. Sánchez-Ballesta

University of Murcia ( email )

Avda Teniente Flomesta, 5
Murcia, Murcia 30100
Spain

José Yagüe (Contact Author)

University of Murcia ( email )

Department of Management and Finance
Campus de Espinardo s/n
Murcia, 30100
Spain
+34 868883862 (Phone)
+34 868887537 (Fax)

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