Earnings Management and Abnormal Returns: Evidence from the 1970-1972 Price Control Regulations

19 Pages Posted: 18 Mar 2003

Abstract

We examine the association between abnormal returns and earnings management in the context of price control regulations to test the construct validity of the earnings management model. Abnormal returns are used as a market-based measure, and discretionary accruals are employed to measure earnings management. Our results support the hypotheses that (1) price control regulations affect firms' security prices negatively, (2) firms make income-decreasing discretionary accruals to increase the likelihood of price increase approval, and (3) firms that are affected most negatively by the regulations manage earnings more aggressively. We conclude that the earnings management model we use in this study is capable of predicting opportunistic discretionary accruals.

Keywords: Earnings management, discretionary accruals, regulation, price control

JEL Classification: M41, M43, L50, L65

Suggested Citation

Bowman, Robert G. and Navissi, Farshid, Earnings Management and Abnormal Returns: Evidence from the 1970-1972 Price Control Regulations. Available at SSRN: https://ssrn.com/abstract=376505

Farshid Navissi

Monash University ( email )

Building H, Caulfield Campus
Melbourne, Victoria 3142 Vic 3145
Australia
+61 405 664941 (Phone)

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