Template-Type: ReDIF-Paper 1.0
Author-Name: Jiao, T.
Author-Name-Last: Jiao
Author-Name-First: Tao
Author-Name: Mertens, G.M.H.
Author-Name-Last: Mertens
Author-Name-First: Gerard
Author-Name: Roosenboom, P.G.J.
Author-Name-Last: Roosenboom
Author-Name-First: Peter
Title: Industry Valuation Driven Earnings Management
Abstract: This paper investigates whether industry valuation impacts firms’ earnings management decisions. Existing accounting literature assumes that industry valuation has a constant impact on this decision. We argue that a higher industry valuation increases the perceived benefits of earnings management at a time when the negative consequences associated with accrual reversal and the probability of detection are believed to be lower. Using a sample of quarterly data of U.S. firms from 1985 to 2005, we find that the four-quarter lagged industry valuation has a positive relationship with industry aggregate (current) discretionary accruals. More specific, one standard deviation increase in the aggregate industry valuation is associated with a significant increase of 2.4 cents in quarterly earnings per share. Our results are robust after controlling for several factors, including bubble years, size, leverage and performance.
Creation-Date: 2007-10-25
File-URL: https://repub.eur.nl/pub/10608/ERS-2007-069-F&A.pdf
File-Format: application/pdf
Series: RePEc:ems:eureri
Number: ERS-2007-069-F&A
Classification-JEL: M, M41
Keywords: Earnings management, Industry valuation, Market to book ratio
Handle: RePEc:ems:eureri:10608