Managerial Discretion in Accruals and Informational Efficiency

42 Pages Posted: 25 Apr 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: March/April 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 abnormal 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 abnormal 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, including tests to validate both our measures of informational efficiency and our measure of managerial discretion in accruals.

Keywords: managerial discretion, abnormal accruals, informational efficiency, stock return variance ratios

Suggested Citation

Perotti, Pietro and Windisch, David, Managerial Discretion in Accruals and Informational Efficiency (March/April 2017). Journal of Business Finance & Accounting, Vol. 44, Issue 3-4, pp. 375-416, 2017. Available at SSRN: https://ssrn.com/abstract=2957928 or http://dx.doi.org/10.1111/jbfa.12241

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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