Earning Investor Trust: The Role of Past Earnings Management

68 Pages Posted: 1 May 2017 Last revised: 11 Jun 2020

See all articles by Florian Eugster

Florian Eugster

Stockholm School of Economics

Alexander F. Wagner

University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swiss Finance Institute

Date Written: June 6, 2020

Abstract

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

Eugster, Florian and Wagner, Alexander F., Earning Investor Trust: The Role of Past Earnings Management (June 6, 2020). Journal of Business Finance and Accounting, ECGI - Finance Working Paper No. 530/2017, Swiss Finance Institute Research Paper No. 17-31, Available at SSRN: https://ssrn.com/abstract=2960560 or http://dx.doi.org/10.2139/ssrn.2960560

Florian Eugster

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Alexander F. Wagner (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland
+41 44 634 3963 (Phone)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Swiss Finance Institute ( email )

Switzerland

HOME PAGE: http://www.alex-wagner.com

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