Discretionary Accruals, Earnings Management and the Valuation of Earnings

2000. Journal of Accounting & Business Research Volume 8: 59-82.

Posted: 3 Mar 2017

See all articles by Anwer S. Ahmed

Anwer S. Ahmed

Texas A&M University - Mays Business School

Jian Zhou

University of Hawaii at Manoa

Multiple version iconThere are 2 versions of this paper

Date Written: 2000

Abstract

This study investigates how discretionary accruals affect earnings valuation (or price-earnings multiples) to provide indirect evidence on whether managers use their discretion over accruals to communicate their private information or to obtain private benefits. The results indicate that earnings multiples are significantly higher when earnings contain large income increasing discretionary accruals than when earnings contain small discretionary accruals. Furthermore, the effect of income decreasing discretionary accruals depends on current performance (measured before discretionary accruals). In periods of high performance, earnings multiples are significantly lower when earnings contain large income decreasing discretionary accruals than when earnings contain small discretionary accruals. This is consistent with the communication hypothesis. In periods of low performance, earnings multiples are significantly higher when earnings contain large income decreasing discretionary accruals than when earnings contain small discretionary accruals. This is consistent with investors viewing income decreasing discretionary accruals as being transitory.

Keywords: discretionary accruals, earnings valuation, information communication

JEL Classification: M4

Suggested Citation

Ahmed, Anwer S. and Zhou, Jian, Discretionary Accruals, Earnings Management and the Valuation of Earnings (2000). 2000. Journal of Accounting & Business Research Volume 8: 59-82.. Available at SSRN: https://ssrn.com/abstract=2926001

Anwer S. Ahmed (Contact Author)

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4353
United States

Jian Zhou

University of Hawaii at Manoa ( email )

Honolulu, HI 96822
United States

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