Financing Decisions and Discretionary Accruals: Managerial Manipulation or Managerial Overoptimism

Financing Decisions and Discretionary Accruals: Managerial Manipulation or Managerial Overoptimism We examine whether discretionary accruals of firms obtaining substantial external financing can be explained by managerial manipulation or managerial overoptimism. Insider trading patterns and press releases around equity and debt financing suggest that managers are more optimistic about their firms around debt financing. Consistent with earlier studies, we find that discretionary current accruals peak when firms obtain equity financing. However, we also find that discretionary accruals peak when firms obtain debt financing. Moreover, discretionary accruals are higher for firms that rely on debt rather than on equity financing. The results are robust to controlling for firm characteristics, excluding small and distressed firms, and using alternative measures of discretionary accruals. These findings support the hypothesis that managerial overoptimism distorts financial statements of firms obtaining external financing. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Behavioral Finance Emerald Publishing

Financing Decisions and Discretionary Accruals: Managerial Manipulation or Managerial Overoptimism

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Publisher
Emerald Publishing
Copyright
Copyright © 2011 Emerald Group Publishing Limited. All rights reserved.
ISSN
1940-5979
DOI
10.1108/19405979201100005
Publisher site
See Article on Publisher Site

Abstract

We examine whether discretionary accruals of firms obtaining substantial external financing can be explained by managerial manipulation or managerial overoptimism. Insider trading patterns and press releases around equity and debt financing suggest that managers are more optimistic about their firms around debt financing. Consistent with earlier studies, we find that discretionary current accruals peak when firms obtain equity financing. However, we also find that discretionary accruals peak when firms obtain debt financing. Moreover, discretionary accruals are higher for firms that rely on debt rather than on equity financing. The results are robust to controlling for firm characteristics, excluding small and distressed firms, and using alternative measures of discretionary accruals. These findings support the hypothesis that managerial overoptimism distorts financial statements of firms obtaining external financing.

Journal

Review of Behavioral FinanceEmerald Publishing

Published: Sep 21, 2011

Keywords: Managerial overoptimism; Earnings manipulation; Discretionary accruals; Debt financing; Equity financing; ; ; ;

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