Impact of earnings management on value‐relevance of accounting information: empirical evidence from Japan

Impact of earnings management on value‐relevance of accounting information: empirical evidence... This paper investigates the impact of earnings management on value relevance of accounting information in the context of Japan. Researchers carrying out earnings management research usually rely on the Jones (1991) or the modified Jones model (1995) to disaggregate accruals into its discretionary and non‐discretionary components. However, because of criticisms leveled against extant models of discretionary accruals, this study instead uses earnings management measures constructed by Leuz et al. (2001) and Bhattacharya et al. (2001) and examines the relationship between these measures and their impact on the value‐relevance of accounting information. The latter is operationalized by the explanatory power of book values and earnings (combined model) and earnings alone (earnings model) for stock price. Results based on 5,318 consolidated firm‐year observations over 1992‐1999 show that, both earnings management measures and aggregate earnings management measures (combination of both earnings smoothing and earnings management measures) are significantly negatively associated with the combined value relevance of book values of equity and earnings (combined model) and value relevance of earnings (earnings model). http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

Impact of earnings management on value‐relevance of accounting information: empirical evidence from Japan

Managerial Finance, Volume 30 (11): 15 – Nov 1, 2004

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Publisher
Emerald Publishing
Copyright
Copyright © 2004 Emerald Group Publishing Limited. All rights reserved.
ISSN
0307-4358
DOI
10.1108/03074350410769344
Publisher site
See Article on Publisher Site

Abstract

This paper investigates the impact of earnings management on value relevance of accounting information in the context of Japan. Researchers carrying out earnings management research usually rely on the Jones (1991) or the modified Jones model (1995) to disaggregate accruals into its discretionary and non‐discretionary components. However, because of criticisms leveled against extant models of discretionary accruals, this study instead uses earnings management measures constructed by Leuz et al. (2001) and Bhattacharya et al. (2001) and examines the relationship between these measures and their impact on the value‐relevance of accounting information. The latter is operationalized by the explanatory power of book values and earnings (combined model) and earnings alone (earnings model) for stock price. Results based on 5,318 consolidated firm‐year observations over 1992‐1999 show that, both earnings management measures and aggregate earnings management measures (combination of both earnings smoothing and earnings management measures) are significantly negatively associated with the combined value relevance of book values of equity and earnings (combined model) and value relevance of earnings (earnings model).

Journal

Managerial FinanceEmerald Publishing

Published: Nov 1, 2004

Keywords: Stock markets; Financial services; Japan

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