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

Gul, Ferdinand A.; Leung, Sidney; Srinidhi, Bin

doi:10.2139/ssrn.429800

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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

Sidney Leung

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

Bin Srinidhi

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

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: Suggested Citation

Gul, Ferdinand A. and Leung, Sidney and Srinidhi, Bin 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