The pricing of discretionary accruals

The pricing of discretionary accruals This paper examines if the stock market prices discretionary accruals. Evidence reveals that, on average, the market attaches value to discretionary accruals. This evidence is consistent with two alternative scenarios: (1) managerial discretion improves the ability of earnings to reflect economic value, and (2) discretionary accruals are opportunistic and value-irrelevant but priced by an inefficient market. Further evidence is consistent with the former explanation. There is evidence of pervasive income smoothing, which improves the persistence and predictability of reported earnings. There is also evidence that discretionary accruals predict future profitability and dividend changes. Despite several sensitivity checks, measurement error in the discretionary accruals proxy is an alternative explanation for the results. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting and Economics Elsevier

The pricing of discretionary accruals

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Publisher
Elsevier
Copyright
Copyright © 1996 Elsevier Ltd
ISSN
0165-4101
D.O.I.
10.1016/S0165-4101(96)00434-X
Publisher site
See Article on Publisher Site

Abstract

This paper examines if the stock market prices discretionary accruals. Evidence reveals that, on average, the market attaches value to discretionary accruals. This evidence is consistent with two alternative scenarios: (1) managerial discretion improves the ability of earnings to reflect economic value, and (2) discretionary accruals are opportunistic and value-irrelevant but priced by an inefficient market. Further evidence is consistent with the former explanation. There is evidence of pervasive income smoothing, which improves the persistence and predictability of reported earnings. There is also evidence that discretionary accruals predict future profitability and dividend changes. Despite several sensitivity checks, measurement error in the discretionary accruals proxy is an alternative explanation for the results.

Journal

Journal of Accounting and EconomicsElsevier

Published: Aug 1, 1996

References

  • Discretionary behavior with respect to allowance for loan losses and the behavior of security prices
    Beaver, W.; Engel, E.E.
  • Detecting earnings management
    Dechow, P.; Sloan, R.; Sweeney, A.
  • Smoothing income in anticipation of future earnings
    DeFond, M.; Park, C.W.
  • Additional evidence on bonus plans and income management
    Gaver, J.; Gaver, K.; Austin, J.
  • Annual bonus schemes and the manipulation of earnings
    Holthausen, R.W.; Larcker, D.; Sloan, R.
  • Dividend policy under asymmetric information
    Miller, M.H.; Rock, K.
  • Managerial ownership and the informativeness of earnings
    Warfield, T.; Wild, J.J.; Wild, K.J.
  • Dividend changes and security prices
    Woolridge, J.R.

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