Earnings Management and Future Corporate Investment

43 Pages Posted: 9 May 2007

See all articles by Vicki Wei Tang

Vicki Wei Tang

Georgetown University - Robert Emmett McDonough School of Business

Date Written: May 2007

Abstract

This paper examines whether earnings management through accounting manipulation has an impact on subsequent corporate investments. Using a measure of earnings management based on the work of Kothari, Leone, and Wasley (2005), I find that investment level in firms with the most aggressive accounting practices is higher and is less sensitive to internal cash flows, whereas investment in firms with the least aggressive accounting practices is more sensitive to internal cash flows. Furthermore, earnings management induces investment inefficiency in the future. The findings suggest that financial reporting has an impact on real investment patterns and efficiency. This paper also provides cross-sectional evidence that corporate investments respond to the market assessment even when it differs from the managerial own assessment of the fundamentals.

Keywords: earnings management, market efficiency, investmen, investment efficiency

JEL Classification: G14, G31, M41, M43

Suggested Citation

Tang, Vicki Wei, Earnings Management and Future Corporate Investment (May 2007). Available at SSRN: https://ssrn.com/abstract=985172 or http://dx.doi.org/10.2139/ssrn.985172

Vicki Wei Tang (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

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