Discretionary Accruals, Managers' Incentives, and Stock Prices

33 Pages Posted: 31 Jan 1998

See all articles by Eric Press

Eric Press

Temple University - Department of Accounting

Wonsun Paek

Sungkyunkwan University

Date Written: November 1997

Abstract

Recent accounting research finds that the discretionary accrual component of earnings communicates managers' private information to stock market participants. We show that effects related to managerial compensation contracts and corporate debt agreements influence how the stock market interprets the discretionary component. Managerial opportunism--signaled by bonus components highly sensitive to earnings, and pre-managed earnings at levels consistent with benefits from exploiting accruals--is associated with negative stock price effects when managers make income-increasing accruals. Opportunism that benefits stockholders relative to debtholders--signaled by firms with high leverage levels--is associated with positive stock price effects when managers make income-increasing accruals. The paper focuses on the incentives managers face in reporting earnings, and provides new evidence on how incentives can influence stock prices.

JEL Classification: M41, M43, G12

Suggested Citation

Press, Eric G. and Paek, Wonsun, Discretionary Accruals, Managers' Incentives, and Stock Prices (November 1997). Available at SSRN: https://ssrn.com/abstract=56232 or http://dx.doi.org/10.2139/ssrn.56232

Eric G. Press (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215-204-8127 (Phone)
215-204-5587 (Fax)

HOME PAGE: http://oll.temple.edu/epress/

Wonsun Paek

Sungkyunkwan University ( email )

25-2, Sungkyunkwan-ro
Jongno-gu
Seoul, 03063
Korea, Republic of (South Korea)
+82-2-760-0415 (Phone)
+82-2-745-4566 (Fax)

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