Earning Investor Trust: The Role of Past Earnings Management
Journal of Business Finance and Accounting
68 Pages Posted: 1 May 2017 Last revised: 11 Jun 2020
Date Written: June 6, 2020
Does earnings management, even though legal, hinder investor trust in reported earnings? Or do investors regard earnings management as a way for firms to convey private information, or simply as a neutral feature of financial reporting? We find that past abstinence from earnings management increases investor responses to future earnings surprises. Importantly, this effect occurs in industries where investor trust has recently been violated, and where managers would in the past have had incentives and opportunities to misrepresent earnings. Overall, investors seem to interpret the extent to which management resists temptations for misreporting as a "litmus test" of trustworthiness.
Keywords: earnings management, earnings response, credibility, trust
JEL Classification: G14, G30, M41
Suggested Citation: Suggested Citation