Earnings Management, Corporate Investments, and Stock Returns

41 Pages Posted: 18 Mar 2005

See all articles by Feixue Xie

Feixue Xie

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance

K.C. John Wei

Hong Kong Polytechnic University

Date Written: March 12, 2005

Abstract

In this paper, we investigate the relation between accounting accruals and abnormal corporate investments and if the accrual-based anomaly documented by Sloan (1996) is distinct from the investment-based anomaly documented by Titman, Wei, and Xie (2004). Our results indicate that abnormal capital investments are positively associated with accounting accruals and that the mispricing of abnormal capital investments is distinct from the mispricing of discretionary current accruals. In addition, investors can earn substantially higher size-adjusted returns by exploiting both strategies at the same time than by exploiting each individual strategy alone. Finally, our result suggests that the stock market appears to overvalue both discretionary current accruals and abnormal capital expenditures.

Keywords: Discretionary accruals, earnings management, abnormal capital investment, market efficiency

JEL Classification: G14, G31, M41, M42

Suggested Citation

Xie, Feixue and Wei, Kuo-Chiang (John), Earnings Management, Corporate Investments, and Stock Returns (March 12, 2005). Available at SSRN: https://ssrn.com/abstract=685113 or http://dx.doi.org/10.2139/ssrn.685113

Feixue Xie (Contact Author)

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance ( email )

500 W. University Ave.
El Paso, TX 79968
United States
915-747-7788 (Phone)
915-747-6268 (Fax)

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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