Informative and Opportunistic Earnings Management and the Value Relevance of Earnings: Some Evidence on the Role of Ios

41 Pages Posted: 22 Aug 2003

See all articles by Ferdinand A. Gul

Ferdinand A. Gul

Monash University Sunway Campus

Sidney Leung

City University of Hong Kong (CityUHK) - Department of Accountancy

Bin Srinidhi

University of Texas at Arlington - Department of Accounting; City University of Hong Kong (CityUHK) - Department of Accountancy

Date Written: July 2003

Abstract

In this paper, we first recognize that managers manage earnings for either informational purposes or for opportunistic purposes. We then explore whether a firm's growth opportunities, as measured by its investment opportunity set (IOS), an exogenous variable, is associated with this choice. In particular, this study examines whether IOS affects managers' choice to report opportunistically to hide performance or to report more informative earnings. Our results show that discretionary accruals improve the value relevance of earnings measured in terms of the earnings-return relationship (ERR) in firms with higher IOS. This is consistent with the notion of a higher proportion of informative earnings management (IEM) in high-IOS firms.

Keywords: capital markets, valuation, opportunistic and informative earnings management, discretionary accruals, investment opportunity set

JEL Classification: G12, G32, G39, M41, M43

Suggested Citation

Gul, Ferdinand A. and Leung, Sidney and Srinidhi, Bin, Informative and Opportunistic Earnings Management and the Value Relevance of Earnings: Some Evidence on the Role of Ios (July 2003). Available at SSRN: https://ssrn.com/abstract=429800 or http://dx.doi.org/10.2139/ssrn.429800

Ferdinand A. Gul

Monash University Sunway Campus ( email )

Jalan Lagoon Selatan
Selangor Darul Ehsan
Bandar Sunway, 46150
Malaysia

Sidney Leung

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China
+852 2788-7924 (Phone)
+852 2788-7944 (Fax)

Bin Srinidhi (Contact Author)

University of Texas at Arlington - Department of Accounting ( email )

Arlington, TX 76013
United States

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

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