Do market participants value earnings management? An analysis using the quantile regression method
ISSN: 0307-4358
Article publication date: 17 December 2018
Issue publication date: 20 February 2019
Abstract
Purpose
The purpose of this paper is to postulate that market participants’ views on the nature of discretionary accruals as earnings management or earnings manipulation could relate to a rise or a fall in a firm’s stock prices.
Design/methodology/approach
Applying the quantile regression and measuring gains and losses according to the stock returns, this study shows that the relation between earnings manipulation and stock returns is non-uniform and it varies significantly across various quantiles of the latter.
Findings
The empirical results imply a positive (negative) |DA|-RETURN relation for stocks experiencing a rise (fall) in stock prices. This finding is consistent with the notion that market participants lean towards (become) trend followers (fundamentalists) when their stocks price rise (fall) and, thus, positively reward (negatively punish) discretionary accruals.
Originality/value
Using the behavioural heterogeneity of market participants as a research framework, this paper contributes to the literature by demonstrating that market participants’ decisions to positively reward (negatively punish) earning management behaviour depend on their perceptions on nature of discretionary accruals (earnings management vs earnings manipulation).
Keywords
Acknowledgements
This paper forms part of a special section “Interdisciplinary finance”.
Citation
Li, L. and Hwang, N.-C.R. (2019), "Do market participants value earnings management? An analysis using the quantile regression method", Managerial Finance, Vol. 45 No. 1, pp. 103-123. https://doi.org/10.1108/MF-02-2018-0087
Publisher
:Emerald Publishing Limited
Copyright © 2018, Emerald Publishing Limited