The Bright Side of Earnings Management

57 Pages Posted: 16 Aug 2018 Last revised: 5 Dec 2018

See all articles by Vivian W. Fang

Vivian W. Fang

University of Minnesota - Twin Cities - Department of Accounting

Renhui Fu

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Date Written: December 4, 2018

Abstract

This paper demonstrates the usefulness of earnings management in correcting stock underpricing. We find that underpricing, measured using mutual fund fire sales or the 2003 trading scandal as a shock, increases the likelihood of firms meeting or marginally beating analyst forecasts. Firms beat earnings targets by cutting R&D as well as making income-increasing reporting choices, but lean towards R&D reduction if reporting manipulation becomes costly. While both types of manipulation accelerate price reversal after fire sales, firms cutting R&D underperform those using accruals in the long-run. These results suggest that reporting discretion can sometimes be desirable to avoid real consequences.

Keywords: Earnings Management, Real Manipulation, Reporting Manipulation, Mutual Funds, Fire Sales, Fire Purchases, Sarbanes-Oxley Act of 2002, Mutual Fund Trading Scandal of 2003

JEL Classification: G01, G11, G23, G34, M41

Suggested Citation

Fang, Vivian W. and Fu, Renhui, The Bright Side of Earnings Management (December 4, 2018). Available at SSRN: https://ssrn.com/abstract=3224800 or http://dx.doi.org/10.2139/ssrn.3224800

Vivian W. Fang (Contact Author)

University of Minnesota - Twin Cities - Department of Accounting ( email )

321 19th Avenue South
Room 3-109
Minneapolis, MN 55455
United States

HOME PAGE: http://www.vivianfang.org

Renhui Fu

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

1954 Huashan Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200030
China
+862152301575 (Phone)

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