Do Managers Credibly Use Accruals to Signal Private Information? Evidence from the Pricing of Discretionary Accruals Around Stock Splits

36 Pages Posted: 11 Nov 2003

See all articles by Henock Louis

Henock Louis

Pennsylvania State University - Smeal College of Business

Dahlia Robinson

Arizona State University - School of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: August 8, 2003

Abstract

Prior studies suggest that managers use their reporting discretion to signal their private information. Because of the litigation risk associated with inflating earnings, we conjecture that managers are more likely to use their reporting discretion to signal favorable private information when they are very confident that future performance will meet the expectations raised by their reports. In addition, because managers are often assumed to use their discretion to mislead investors, we also conjecture that, without a second corroborating signal, discretionary reporting is likely to be regarded as opportunistic. The extant literature strongly suggests that managers split their stock when they are optimistic about their firms' future prospect. However, existing studies also suggest that a stock split is only partially effective as a signal. Hence, we posit that, if managers use their reporting discretion to signal favorable private information, they are likely to do so in conjunction with stock splits. The reporting signal reinforces the stock split signal whereas the stock split signal lends credibility to the reporting signal. Consistent with our conjectures, we find strong evidence indicating that managers use accruals in conjunction with stock splits to signal good performance. The evidence also suggests that the signal is deemed credible by the market.

Note: Previously titled "The Use of Accruals as a Signaling Device: An Analysis of Earnings Re-Pricing around Stock Splits"

Keywords: Stock split, earnings management, signaling, market efficiency, income smoothing

JEL Classification: M41, M43, G14

Suggested Citation

Louis, Henock and Robinson, Dahlia, Do Managers Credibly Use Accruals to Signal Private Information? Evidence from the Pricing of Discretionary Accruals Around Stock Splits (August 8, 2003). Available at SSRN: https://ssrn.com/abstract=447421 or http://dx.doi.org/10.2139/ssrn.447421

Henock Louis (Contact Author)

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802-3306
United States
814-865-4160 (Phone)
814-863-8393 (Fax)

Dahlia Robinson

Arizona State University - School of Accountancy ( email )

Tempe, AZ 85287
United States

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