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Does investor sentiment affect earnings management?

Simpson, Ana (2013) Does investor sentiment affect earnings management? Journal of Business Finance and Accounting, 40 (7-8). pp. 869-900. ISSN 0306-686X

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Identification Number: 10.1111/jbfa.12038


I hypothesize and find that earnings management via accruals is driven partially by the prevailing market-wide investor sentiment. Managers inflate earnings in periods of higher sentiment, but report more conservatively during periods of low sentiment. Moreover, the likelihood of income-increasing earnings management to avoid negative earnings surprises is also positively associated with investor sentiment. These results are robust to: (i) controls for time-varying firm characteristics such as growth, investment opportunity sets, future profitability, leverage and size; (ii) macroeconomic variables such as future inflation, GDP growth, and growth in industrial production; (iii) multiple proxies for investor sentiment; and (iv) discretionary revenues as alternative measure of earnings management. Cross-sectional analyses reveal that firms whose stock returns co-move more with investor sentiment are more (less) likely to manage earnings upward via abnormal accruals in quarters of higher (lower) sentiment. The findings of managers’ strategic use of abnormal accruals show the need for increased attention from boards of directors, auditors and regulators to heightened managerial incentives to overstate earnings and to report optimistic earnings numbers during periods of high investor sentiment.

Item Type: Article
Official URL:
Additional Information: © 2013 John Wiley & Sons Ltd
Divisions: Accounting
Subjects: H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking; Venture Capital; Brokerage; Rating Agencies
Date Deposited: 16 Sep 2013 09:40
Last Modified: 06 Feb 2024 00:10

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